Warrants are frequently issued in connection with the formation and initial registered offerings of SPACs, but apparently there have been some problems with accounting for some of these warrants, or at least, so it appears from this Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) from Acting Corp Fin Director John Coates and Acting Chief Accountant Paul Munter. The Statement is intended to “highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions” and to discuss what needs to be done if this Statement leads a company and its auditors to determine there is an error in any previously filed financial statements. The primary issue identified in the Statement is whether these warrants should be classified as equity or liabilities, which depends largely on the specific terms of the warrant and the entity’s specific facts and circumstances.
As has been widely reported, there has been a phenomenal increase in the volume of SPAC transactions as an alternative approach to becoming a public company. According to Bloomberg, around “300 SPACs launched on U.S. exchanges in the first quarter, raising almost $100 billion. That total was more than all of last year.” In this statement, Corp Fin Acting Director John Coates discusses liability risks potentially arising out of SPAC and de-SPAC transactions, that is, the transactions in which a private operating company undertakes a business combination with a SPAC, ultimately becoming a public operating company. The essence of his message is: why should a SPAC be treated differently from a traditional IPO?
According to the staff of the SEC’s Office of the Chief Accountant, in “just the first two months of 2021, both the number of new SPACs and amount of capital raised by those SPACs have been reported to already match approximately three-fourths of all such activity last year.” And there was quite a bit of SPAC activity last year. In light of the incredible volume of SPAC deals, on Wednesday, the staffs of Corp Fin and the OCA issued special guidance for SPACs. These statements address shell company, financial reporting, accounting, internal control, governance and auditor considerations in connection with a de-SPAC transaction, that is, a transaction in which a private operating company undertakes a business combination with a SPAC, ultimately becoming a public operating company. Both staffs seem to question whether the timing and other circumstances of de-SPAC transactions mean that the private operating company targets may not be fully equipped for what comes next and want stakeholders to carefully consider whether each of these private targets, in the words of OCA, has “a clear, comprehensive plan to be prepared to be a public company.” Corp Fin also wants all those who are clamoring for SPACs to be aware of all restrictions, impediments and other potential hiccups that come with the package. Could they possibly be trying to put the kibosh on SPAC fever? According to Reuters, analysts think the SEC is “worried about how much due diligence is performed by SPACs before acquiring assets, and about disclosures to investors.”
Happy new year! To complete the year- and term-end surge, just before Christmas, the Corp Fin staff issued CF Disclosure Guidance: Topic No. 11 regarding disclosure considerations for special purpose acquisition companies in connection with their IPOs and subsequent business combinations, often referred to as de-SPAC transactions. As usual, the staff provides some great questions to consider when crafting disclosure.
Tuesday, at the CNBC Financial Advisor Summit, SEC Chair Jay Clayton was interviewed by CNBC’s Bob Pisani, touching on a variety of issues, including SPACs, proposed changes to Form 13F, ESG ratings and investing, emerging market listings and other topics of interest. No breaking news, but some insight into the SEC’s thinking on these subjects.
Here are two quick items regarding popular IPO alternatives, SPACs (special purpose acquisition corporations) and primary direct listings.