WASHINGTON – Some special-purpose procurement companies have improperly accounted for mandates sold or granted to investors, securities regulators said Monday, stepping up control of popular vehicles.
Mandates are a standard part of how SPAC collects money, including from hedge funds and other private investors. The potential return for early investors in SPACs is huge if the company’s shares increase due to various features of the structure, including mandates that give investors the right to buy more shares at a predetermined price in the future.
SPACs are unverified companies that raise money from the public in order to buy a business and make it public. If the transaction takes place, the target company takes the place of SPAC on a stock exchange, in a transaction that resembles an initial public offering. SPACs have increased in the last year, as many transaction factors rushed to initiate them and take advantage of investors’ thirst for the structure.
SPACs normally classified collateral in their balance sheets as equity. In certain circumstances, they should be classified as liabilities, which would require the company to take regular account of changes in the value of mandates, the Securities and Exchange Commission said in a statement released Monday. One of the impacts of the SEC announcement: affected SPACs should restore their financial results if the fluctuations are considered significant, the SEC said.
The watchdog on Wall Street began to look more closely at the market as SPACs proliferated this year, raising nearly $ 100 billion. A senior SEC official said last week that SPACs may have no regulatory advantage over the standard public offering, noting that the agency will examine the shortcomings in the same way that IPOs do.
The SEC did not say in its statement how it came to revise the accounting treatment for mandates, which have been part of SPACs for decades. One person familiar with the matter said the agency had received questions from a SPAC about how generally accepted accounting principles require the assessment of mandates, and regulators have dug in from there. The financial statements of SPACs were usually audited by smaller accounting firms, not by the four large companies that review the books of most large public companies.
The SEC did not say on Monday how many SPACs would be affected by its view on mandates. But he suggested that more than one hand will have to heed his statement.
Not all SPACs will be affected, but many will be, the SEC suggested in its statement. “Although the specific terms of such mandates may vary, we understand that certain features of mandates issued in SPAC transactions may be common to many entities,” wrote the SEC’s interim director of corporate finance and interim chief accountant.
These features include collateral that may be settled differently for some holders, such as collateral that may be exchanged for cash rather than shares. They also include guarantees with a payment that varies depending on who the owner is – such as giving a richer return to SPAC founders or early investors than to public shareholders.
Write to Dave Michaels at [email protected]
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It appeared in the April 13, 2021 print edition as “SPAC Warrants Draw SEC Scrutiny.”