SEC Guidance Prompts SPAC Restatements

A few months ago, we told you about the mounting speculation that the Securities and Exchange Commission would take a more active role in regulating SPACs. In the meantime, the agency issued guidance indicating that SPACs may need to file altered financial statements to address accounting for warrants, which give SPAC investors the option to buy additional shares of stock at a fixed price. Rather than classifying such instruments as equity, the SEC advised SPACs that warrants might constitute liabilities.

SPACs took the SEC’s guidance to heart, triggering a wave of financial restatements. According to data from the Intelligize platform, SPACs filed 288 financial disclosures related to the new accounting treatment for warrants between May 3 and June 2.

The language used in the disclosures generally fell in line with Altitude Acquisition Corp.’s characterization in the risk factors section of its 10-K filed on June 1: “As a result of the SEC Staff Statement, we reevaluated the accounting treatment of our 15,000,000 public warrants and 8,000,000 private placement warrants, and determined to classify the warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings.” Shifting the warrants from equity to liabilities also resulted in changes to the SPACs’ balance sheets.

New accounting rules may not be the end of the SEC’s changes for SPACs, though, as they continue to come to market. According to the website SPAC Research, 330 SPACs have gone public so far in 2021 and raised $104.8 billion, which works out to an average size of $317.6 million. That follows 248 SPACs going public last year and raising $83.4 billion.

At a hearing of the House Appropriations Committee last week, SEC Chair Gary Gensler said the agency is still evaluating the need for stronger protections for SPAC investors. That goes especially for mom-and-pop investors who might lack the sophistication of major institutions. The performance of SPACs this year seemingly speaks to the urgency to develop those protections: According to the CNBC SPAC Post Deal Index, the blank-check companies have lost about 20% of their value since the start of February.

For now, however, the SPAC market appears to have hit a lull. Only 32 of the 330 SPAC offerings this year have occurred since the end of the first quarter.

It seems likely that the SEC’s saber-rattling has played some role in that slowdown. Even if issuers aren’t having second thoughts about going public, practitioners report the explosion in demand for SPAC-related work is creating bottlenecks in the transaction pipeline. The guidance that triggered so many financial restatements only added to their increased workload.

But consider this more of a pause to let the market find its equilibrium. Investors have yet to show any signs that they’ve tired of buying stock in SPACs just yet.