Analysis

Accounting crackdown threat for the SPACs

, Edge Markets

U.S. regulators are throwing another wrench into Wall Street’s SPAC machine by cracking down on how accounting rules apply to a key element of blank-check companies.

The SEC is setting forth new guidance that warrants, which are issued to early investors in the deals, might not be considered equity instruments and may instead be liabilities for accounting purposes.

The accounting considerations mark the latest effort by the SEC to clamp down on the white-hot SPAC market. For months, the regulator has been raising red flags that investors aren’t being fully informed of potential risks associated with blank-check companies, which list on public stock exchanges to raise money for the purpose of buying other entities.

“The SEC indicated that they will not declare any registration statements effective unless the warrant issue is addressed,” according to a client note sent by accounting firm Marcum that was reviewed by Bloomberg.

In a SPAC, early investors buy units, which typically includes a share of common stock and a fraction of a warrant to purchase more stock at a later date. They’re considered a sweetener for backers and have thus far been considered equity instruments for accounting purposes.

In a statement late Monday, SEC officials urged those involved in SPACs to pay attention to the accounting implications of their transactions. They said that a recent analysis of the market had shown a fact pattern in transactions in which “warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.”

“The evaluation of the accounting for contracts in an entity’s own equity, such as warrants issued by a SPAC, requires careful consideration of the specific facts and circumstances for each entity and each contract,” the officials said in the statement.

The SEC issued its guidance after a firm asked the agency how certain accounting rules applied to SPACs, according to another person familiar with the matter. It’s unclear how many companies will be impacted by the move and not all warrants will be affected. Still, regulators consider it likely to be a widespread issue. Firms will be expected to review their statements and correct any material errors, said the person.

The shift would spell a massive nuisance for accountants and lawyers, who are hired to ensure blank-check companies follow the agency. SPACs that are already public and that have struck mergers with targets may have to restate their financial results, the people familiar with the matter said.

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