Photographer: Andrew Harrer / Bloomberg
Photographer: Andrew Harrer / Bloomberg
U.S. regulators throw another key at the Wall Street SPAC machine, cracking down on how accounting rules are applied to a key element of blank-checking companies.
The Securities and Exchange Commission presents news guidance that warrants, issued to initial investors in transactions, may not be considered equity instruments and may instead be liabilities for accounting purposes. The move, previously reported by Bloomberg News, threatens to disrupt the presentation of new special-purpose acquisition companies until the issue is resolved.
Accounting considerations mark the SEC’s latest effort to curb the hot SPAC market. For months, the regulator has been raising red marks indicating that investors are not fully aware of the possible risks associated with blank check companies, which are listed on public stock exchanges to raise money in order to buy other entities. .
See also: SEC Warns SPAC Values law is not a way to go wrong
The SEC began contacting accountants last week with guidelines on guarantees, according to people familiar with the matter. A number of hundreds of files for new SPACs could be affected, people said, asking not to be named because the conversations were private.
“The SEC indicated that they will not declare any registration statement effective unless the collateral issue is addressed,” according to a customer note sent by accounting firm Marcum that was reviewed by Bloomberg.
In a SPAC, early investors buy units, which usually include a common stock share and a guarantee fraction to buy more shares at a later date. They are considered a sweetener for sponsors and have so far been considered equity instruments for accounting purposes. Typically, sponsoring teams (managing a SPAC) also receive guarantees as part of their reward for finding an agreement, in addition to the founding actions.
In a statement last Monday, SEC officials urged those involved in SPAC to pay attention to the accounting implications of their transactions. They said a recent market analysis had shown a pattern of fact in transactions in which “warrants should be classified as a liability measured at their fair value, with changes in fair value each period recorded in profits.”
“The assessment of the accounting of contracts in an entity’s own equity, such as warrants issued by an SPAC, requires careful consideration of the specific facts and circumstances of each entity and each contract,” officials said in the communiqué.
The SEC issued its guidelines after a company asked the agency how certain accounting rules applied to SPACs, according to another person familiar with the matter. It is unclear how many companies will be affected by the move and not all guarantees will be affected. However, regulators believe it is likely to be a widespread problem. Companies are expected to review their statements and correct any material errors, the person said.
The change would be a massive nuisance for accountants and lawyers, who are hired to ensure blank verification companies comply with the agency. SPACs that are already public and have achieved mergers with goals may need to reaffirm their financial results, said people familiar with the matter.
More than 550 SPACs have been filed to make themselves public on U.S. stock exchanges during the year so far, seeking to raise $ 162 billion combined, according to data collected by Bloomberg. This exceeds the total for the whole of 2020, during which SPACs were collected more than all previous years combined.
The flood has overwhelmed those responsible for reviewing applications to the SEC, triggered an increase in liability insurance rates for companies with blank checks, and fueled market anxieties that the bubble is ready. to explode.
– With the assistance of Robert Schmidt
(Updates with the SEC guide from the second paragraph)