SPAC transactions stall amid SEC crackdown, cooling retail investor interest

SPAC’s rage has stopped.

Just last month, special-purpose procurement companies celebrated a turning point by breaking the 2020 emissions record in just three months. After more than 100 new offers in March alone, emissions are almost blocked, with only 10 SPACs in April, according to SPAC Research.

The sharp slowdown came after the Securities and Exchange Commission issued accounting guidelines that would classify SPAC guarantees as liabilities instead of equity instruments. If it becomes law, ongoing transactions as well as existing SPACs should return and recalculate their financial statement in 10-K and 10-Q for the value of mandates in each quarter.

“SPAC transactions have essentially stopped,” said Anthony DeCandido, a partner at RSM LLP. “This will cause these companies a lot of money to evaluate and appreciate these mandates on a quarterly basis, rather than at the beginning of SPAC. Many of these groups do not have the internal sophistication to do this alone.”

SPACs raise capital in an initial public offering and use the money to merge with a private company and make it public, usually within two years. Mandates are a sweetener that offers early investors more compensation for their cash.

This potential change in accounting rules could be a huge blow to the SPAC market, as it could remove incentives for sponsors and companies operating to opt for this alternative IPO vehicle – low level of control and ability to move quickly. Meanwhile, the reconditioning of financial data could damage investor confidence in a market that is already highly volatile and often viewed as speculative.

“In the world of accounting, this is one of the biggest challenges you can face is if you have finished the job and then you have to go back and do it because it only looks weak on the outside and evokes the level of public confidence you have. you really want it, “DeCandido said.” Keep examining what was already a very incomprehensible exit plan in SPACs. “

To make matters worse, over 90% of SPACs are audited by only two accounting firms in the last six years, Marcum and WithumSmith + Brow, according to SPAC Research. This could mean a significant delay as SPACs struggle to adhere to the new accounting rules.

Many SPAC stocks are in a free fall amid regulatory success. The CNBC SPAC Post Deal owner index, which consists of the largest SPACs that have announced a target or those that have already completed a SPAC merger in the last two years, has eliminated earnings in 2021 and fallen by more than 20% since one year to another Tuesday’s closing date.

There have been signs that retail investors may have secondary thoughts about SPACs. Bank of America customer flows showed that the retail purchase of SPAC slowed significantly from its weekly net purchase of $ 120 million at the beginning of the year to just one figure in April.

“Early April data suggests that retail may return to its ‘traditional’ roots, favoring more established companies over low-priced speculative securities,” Bank of America analysts said in a note Monday.

Clover Health, which merged with the share capital of Chamath Palihapitiya Hedosophia Holdings Corp. III in January fell by more than 10% on Tuesday, pushing losses in 2021 to almost 50%.

SPAC dMY Tech, which makes the sports betting company Genius Sports public on Wednesday under the symbol GENI, fell by more than 11% on Tuesday.

– With the assistance of CNBC’s Gina Francolla.