U.S. regulators are throwing another wrench into Wall Street’s SPAC machine by cracking down on how accounting rules apply to a key element of blank check companies.
The Securities and Exchange Commission presents new advice that warrants, which are issued to the first investors in transactions, may not be considered equity instruments and may instead be liabilities for accounting purposes. The move, reported earlier by Bloomberg News, threatens to disrupt the filings of new special purpose acquisition companies until the issue is resolved.
Accounting considerations mark the SEC’s latest effort to tackle the white-hot PPCS market. For months, the regulator has reported that investors are not fully informed of the potential risks associated with blank check companies, which go public to raise funds for the purpose of buying other entities.
See also: SEC Warns SPAC Are not a way around securities law
The SEC began contacting accountants last week with advice on the warrants, according to people familiar with the matter. A pipeline of hundreds of new PSPC filings could be affected, said the people, who asked not to be named because the conversations were private.
“The SEC has indicated that it will not report any actual registration statements unless the mandate issue is resolved,” according to a client memo sent by accountancy firm Marcum which was reviewed by Bloomberg.
In a SPAC, early investors buy units, which typically consist of a common share and a fraction of a warrant to buy more shares at a later date. They are viewed as a sweetener for supports and have so far been viewed as equity instruments for accounting purposes. Teams of sponsors – the leadership of a PSPC – typically receive warrants as part of their reward for reaching a deal, in addition to the founder’s actions.
In a statement Monday evening, SEC officials urged those involved in PSPCs to pay attention to the accounting implications of their transactions. They said a recent market analysis had shown a pattern of fact in transactions where “warrants should be classified as a liability measured at fair value, with changes in fair value at each period being recognized in the results”.
“Assessing the recognition of contracts in an entity’s equity, such as warrants issued by a PSPC, requires careful consideration of the specific facts and circumstances for each entity and each contract,” officials said in the statement. communicated.
The SEC released its guidance after a firm asked the agency how certain accounting rules apply to PSPCs, according to another person familiar with the matter. It is not known how many companies will be affected by the move and not all warrants will be affected. Yet regulators consider this to be a likely widespread problem. Businesses will have to review their returns and correct any material errors, the person said.
This change would be a huge nuisance for accountants and lawyers, who are hired to ensure that blank check companies comply with the agency. PSPCs that are already public and have entered into mergers with targets may need to restate their financial results, people familiar with the matter said.
More than 550 PSPCs have applied for public listing on U.S. exchanges since the start of the year, seeking to raise a total of $ 162 billion, according to data compiled by Bloomberg. This exceeds the total for the whole of 2020, in which PSPCs raised more than each previous year combined.
The deluge overwhelmed SEC filing reviewers, sparked a spike in liability insurance rates for blank check companies, and fueled market fears that the bubble was about to collapse. to burst.
– With the help of Robert Schmidt
(Updates with SEC guidance from second paragraph)
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