SPAC transactions come to a halt in the SEC’s crackdown, which cools the interest of retail investors

The SPAC mania has stopped screaming.

Just last month, special purpose procurement companies held a decisive milestone by breaking the 2020 emissions record in just three months. After more than 100 new offers in March alone, issuance is virtually halted with only 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 guarantees as liabilities rather than equity instruments. If it becomes law, ongoing operations, as well as existing SPACs, should go back and recalculate their financial resources at 10-Ks and 10-Qs for the value of each quarter’s warrants.

“SPAC transactions have essentially stopped,” said Anthony DeCandido, a partner at RSM LLP. “This will cause these companies to have a lot of money to evaluate and value these guarantees every quarter instead of just at the beginning of the SPAC. Many of these groups do not have the internal sophistication to do it themselves.”

SPACs raise capital in an initial public offering and use the cash to merge with a private company and make it public, usually within two years. Warrants are a bidding sweetener that offers early investors more compensation for their cash.

This potential change in accounting rules could be a major blow to the SPAC market, as it could eliminate incentives for sponsors and operating companies to opt for this alternative IPO vehicle: low level of scrutiny and ability to move quickly. . Meanwhile, the collection of financial data could further deteriorate investor confidence in a market that is already highly volatile and often considered speculative.

“In the world of accounting, this is one of the biggest challenges you can face is if you’ve finished the job and you have to go back and do it because it just looks bad on the outside and evokes the level of public confidence you really want. “DeCandido said. “It’s just further analyzing what has already been a very misunderstood exit plan in the SPACs.”

To make matters worse, more than 90% of SPACs are audited by just two accounting firms in the last six years, Marcum and WithumSmith + Brow, according to SPAC Research. This could mean a significant delay as SPACs soar to adhere to the new accounting standards.

Many SPAC stocks are in free fall amid regulatory success. The proprietary CNBC SPAC Post Deal Index, which is made up of the largest SPACs that have announced a goal or have already completed a SPAC merger in the past two years, has wiped out 2021 earnings and fallen more than 20 % interannual date of closing of Tuesday.

Signs emerged that retail investors might have a second thought about SPACs. Bank of America customer flows showed that SPAC’s retail buying slowed significantly, going from weekly net purchases of $ 120 million at the beginning of the year to just one digit in April.

“Early April data suggests retail may return to its ‘traditional’ roots, favoring more established firms rather than low-priced speculative stocks,” analysts said Monday in a note from Bank of Analysts America.

Clover Health, which merged with the share capital of Chamath Palihapitiya Hedosophia Holdings Corp. III, in January, fell more than 10% on Tuesday and pushed its losses in 2021 to nearly 50%.

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 assistance of CNBC’s Gina Francolla.