Big change in SPAC warrants
The Securities and Exchange Commission (SEC) raised the warrant-accounting issue earlier this month in a statement saying companies should be classifying the warrants on their balance sheet as a liability rather than as equity.
Companies issue the warrants along with shares in the SPAC as part of a unit to attract investors who are being asked to invest in the publicly traded shell company with no way of making money until it combines with a promising private company.
Analysts see the SEC action as part of an effort to cool the SPAC market, which exploded last year under a deregulatory push by the last administration to encourage more companies to go public. The SEC leadership under the Biden administration has said it also wants to encourage more IPOs while ensuring alternatives, like SPACs, are structured soundly.
The switch to classify the warrants as a liability stems from the cash outlay companies could face if they’re forced to extend a tender offer to shareholders.
Although specifics differ by SPAC, in general, if the value of a company's shares rises above a threshold level for a specified number of days within a reporting period, companies could face a qualifying tender offer and be liable for cash payments.
Unlike with an equity classification, a liability requires companies to update the valuation of the warrants every quarter, rather than just at the start of the SPAC, because the cash liability changes as the valuation changes. As a result, companies must go back and recalculate on their 10-K and 10-Qs the value of the warrants for each quarter up to and after the SPAC IPO.Read more