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SPAC Boom faces new SEC threat with accounting crackdown




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”.

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