It’s been weeks since the SEC last took SPACs to task! According to Bloomberg, the SEC is now requiring many SPACs to “Big R” restate their financial statements because they tripped over the classification of certain shares they offered to investors. Auditors with whom Bloomberg spoke said that the latest SPAC accounting snafu relates to incorrect categorization of Class A shares—which are typically redeemable—as “permanent equity instead of temporary equity.” One auditor described the issue as “pervasive[:] everyone’s dealing with it because everyone did it wrong.”
SPACs typically issue non-redeemable founders’ shares and redeemable Class A shares as part of their capital structures. The redemption feature in the Class A shares provides part of the appeal of SPACs for many investors: if they aren’t satisfied with the de-SPAC merger transaction, they can simply redeem their shares for cash. However, under ASC 480, “if an equity instrument is redeemable and this redemption feature is outside the control of the company, that instrument can’t be considered permanent,” advised another auditor, whose firm, he insisted, consistently applied the proper accounting treatment.
Apparently, “most audit firms considered the errors small enough to be fixable with a revision, a minor correction that gets disclosed in the next period’s financial statement,” the article reports. However, according to one auditor cited in the article, “the SEC came back and made it clear that they believe it’s a big R.” That means that, instead of a simple “little r” revision, companies will need to file a “Big R” restatement, requiring them to file an 8-K reporting that the financial statements may no longer be relied on and to complete a more time-consuming and complicated restatement of their financial statements. However, that chore may be a bit lighter than normal. One audit firm reported being advised by the SEC that it “won’t require SPACs to amend their old 10-Qs, as is the case with typical ‘Big R’ restatements. Instead, SPACs can offer details about the corrections in their next filing.” Nevertheless, it was “unclear” how the SEC would approach corrections for past annual financial statements.
The auditors cited in the article believe that this equity classification snag “isn’t likely to cause as much of a disruption” as the stumble over warrant classification because the equity classification errors “do not affect the cash or the economics of a SPAC.” Still, the burden of implementing the restatement remains, and the issue could certainly interfere with SPAC timetables: “That’s because most SPACs need to maintain tangible assets of a certain amount to consummate a business combination. If their permanent equity dips, it can tie up a deal.”