Photographer: Andrew Harrer / Bloomberg
Photographer: Andrew Harrer / Bloomberg
US regulators are throwing another key into Wall Street’s SPAC machine by working hard on how accounting rules apply to a key element of blank check businesses.
The Securities and Exchange Commission outlines new ones guidelines that warrants issued to early investors in the deals may not be considered equity instruments and may instead be accounting liabilities. The move, previously reported by Bloomberg News, threatens to disrupt filings for new specialty acquisition companies until the issue is resolved.
The accounting considerations mark the SEC’s latest attempt to curb the white-hot SPAC market. For months, the regulator has been raising warning signs that investors are not being fully informed of potential risks associated with blank check companies, which are quoted on public stock exchanges to raise money to buy other entities.
See also: SEC warns SPACs Are not a way to get around securities laws
The SEC began contacting accountants last week with the warrant guidelines, according to people familiar with the matter. A pipeline of hundreds of filings for new SPACs could be affected, the people said, who asked not to be named because the talks were private.
“The SEC indicated that they will not declare registration statements effective unless a warrant issue is addressed,” said a client note from the accounting firm Marcum reviewed by Bloomberg.
In a SPAC, early investors buy units, which typically include a share of common stock and a fraction of a warrant, to buy more shares at a later date. They are considered a sweetener for lenders and have hitherto been considered as equity instruments for accounting purposes. Sponsor teams – the management of a SPAC – also typically receive warrants as part of their reward to find a deal, in addition to the founders’ shares.
In a statement late Monday, SEC officials urged those involved in SPACs to pay attention to the accounting implications of their transactions. They said a recent analysis of the market had shown a pattern of fact in transactions in which “warrants should be classified as a liability measured at fair value, with changes in fair value reported in profit each period.”
“Evaluating the accounting of contracts in an entity’s equity, such as warrants issued by an SPAC, requires careful consideration of the facts and circumstances specific to each entity and contract,” the officials said in the statement.
According to another person familiar with the matter, the SEC issued its guidelines after a company asked the agency how certain accounting rules applied to SPACs. It is unclear how many companies will be affected by the move and not all warrants will be affected. Still, regulators see it as a widespread problem. Companies are expected to revise their statements and correct any material errors, the person said.
The shift would be a huge inconvenience to accountants and lawyers, who are hired to ensure that companies with blank checks comply with the bureau. SPACs that are already public and that have caused mergers with targets may need to repeat their financial results, the people familiar with the matter said.
According to Bloomberg data, more than 550 SPACs have filed to go public on US stock exchanges in the past year with the goal of raising $ 162 billion in aggregate. That’s more than the total for the whole of 2020, in which SPACs raised more than each combined last year.
The Flood has overwhelmed those responsible for reviewing filings with the SEC, led to a hike in liability insurance rates for blank check companies, and sparked market fears that the bubble is about to burst.
– With the help of Robert Schmidt
Updates with SEC guidelines starting in the second paragraph