Photographer: Andrew Harrer / Bloomberg
Photographer: Andrew Harrer / Bloomberg
U.S. regulators are throwing another key into the Wall Street SPAC car, preventing the way accounting rules apply to a key element of companies with incomplete verification.
The Securities and Exchange Commission presents new guidance that guarantees, which are issued to early 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 discontinue deposits for new special-purpose procurement companies until the issue is resolved.
Accounting considerations mark the SEC’s most recent effort to counter the white SPAC market. For months, the regulator has raised red flags that investors are not fully aware of the potential risks associated with blank check companies, which are listed on public stock exchanges to raise money to buy other entities.
See also: SEC Warns SPACs There is no way around the Securities Law
The SEC began addressing accountants last week with guidance on mandates, according to people familiar with the matter. A number of hundreds of deposits for new SPACs could be affected, said people, who asked not to be named because the conversations were private.
“The SEC has indicated that it will not declare any effective registration statement unless the mandate issue is resolved,” according to a client note sent by accounting firm Marcum, which was reviewed by Bloomberg.
In a SPAC, early investors buy units, which usually include a common share and a term fraction to buy more shares at a later date. They are considered sweeteners for supporters and have so far been considered equity instruments for accounting purposes. Sponsorship teams – managing a SPAC – usually receive mandates to find a business, in addition to the founder’s actions.
In a statement late Monday, SEC officials urged those involved in the SPAC to pay attention to the accounting implications of their transactions. They said a recent market analysis showed a de facto pattern in transactions in which “guarantees should be classified as a measured fair value liability, with changes in fair value in each period reported in earnings”.
“Assessing the accounting of contracts in an entity’s equity, such as mandates issued by a SPAC, requires a careful analysis of the specific facts and circumstances for each entity and for each contract,” the officials said in the statement.
The SEC issued its guide after a firm asked the agency how certain accounting rules apply to SPACs, according to another person familiar with the matter. It is not clear how many companies will be affected by this move and not all mandates will be affected. However, regulators consider this to be a widespread problem. The companies will be expected to review their statements and correct any material errors, the person said.
The change would mean a massive inconvenience for accountants and lawyers, who are hired to ensure companies without verification are in compliance with the agency. SPACs that are already public and have merged with targets may need to restore their financial results, said people familiar with the matter.
More than 550 SPACs have been listed on the US stock exchange so far this year, aiming to raise a total of $ 162 billion, according to data compiled by Bloomberg. This exceeds the total for the whole of 2020, during which time the SPACs have increased more than in each previous year combined.
The flood overwhelmed those responsible for reviewing SEC filings, triggered an increase in liability insurance rates for companies with incomplete verification, and fueled market anxieties that the balloon was about to explode.
– With the assistance of Robert Schmidt
(Updates with SEC guidance starting with the second paragraph)