Traders will work on the floor of the New York Stock Exchange (NYSE) Friday.
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The SPAC mania has come to a screeching halt.
Last month, special acquisition companies celebrated a striking milestone by breaking their 2020 issuance record in just three months. After more than 100 new deals in March alone, issuance is nearing a halt with just 10 SPACs in April, according to data from SPAC Research.
The drastic slowdown came after the Securities and Exchange Commission issued accounting guidelines that would classify SPAC warrants as liabilities rather than equity instruments. If it becomes law, deals in the pipeline and existing SPACs would have to go back and recalculate their financial data quarterly in 10-K’s and 10-Q’s for warrant value.
“SPAC transactions have essentially stalled,” said Anthony DeCandido, partner at RSM LLP. “This will give these companies a lot of money to evaluate and value those warrants on a quarterly basis, rather than just at the start of the SPAC. Many of these groups lack the sophistication internally to do this themselves.”
SPACs raise capital on an IPO and use the money to merge with a private company and make it public, usually within two years. Warrants are a deal sweetener that offers early investors more compensation for their money.
This potential change in accounting rules could be a huge blow to the SPAC market as it could remove the incentives for sponsors and operating companies to opt for this alternative IPO vehicle – low level of control and the ability to act quickly. Meanwhile, restating financial data could further erode investor confidence in a market that is already highly volatile and often viewed as speculative.
“In the accounting world, that’s one of the biggest challenges you can face: when you’ve finished the work and then you have to go back to do it because it’s hard to see on the outside and it instills the public trust that you really do. want., “said DeCandido.” It just explores what was already a very misunderstood exit plan in SPACs. “
To make matters worse, more than 90% of SPACs are audited by just two accounting firms, Marcum and WithumSmith + Brow, according to SPAC Research. This could mean a significant backlog as SPACs rush to adhere to new accounting rules.
Many SPAC stocks are in free fall amid the regulatory blow. The proprietary CNBC SPAC Post Deal Index, which consists of the largest SPACs that have announced a target or have already completed a SPAC merger in the past two years, has wiped out profits in 2021, falling more than 20% year to year. date from the closing of Tuesday.
There were signs that retail investors may have doubts about SPACs. Bank of America’s customer flows showed that retail SPACs purchases slowed significantly from $ 120 million in weekly net purchases at the start of the year to just a few figures in April.
“Initial April data suggests that retail may be returning to their ‘traditional’ roots, favoring more established companies over low-priced, speculative securities,” Bank of America analysts said in a note on Monday.
Clover Health, which merged with Chamath Palihapitiya’s Social Capital Hedosophia Holdings Corp. in January. III, fell more than 10% on Tuesday, bringing the loss to nearly 50% in 2021.
SPAC dMY Tech, which makes sports betting company Genius Sports public on Wednesday under the symbol GENI, fell more than 11% on Tuesday.
– With the help of CNBC’s Gina Francolla.
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