Staff at the Securities and Exchange Commission are drafting guidance on forward-looking statements by special purpose acquisition companies (SPACs) as part of a regulatory push on the IPO alternative, but whether the SEC leadership will sign off on the guidance isn’t clear, Reuters reported.
The SEC has said it’s concerned about the rush in SPACs, which let investors take a promising start-up public more easily by pooling money to acquire it through a publicly listed blank-check company.
SPACs have been around for decades, but their popularity increased shortly before the pandemic and has surged since then. More than 550 SPACs have filed to go public this year, a record, although the number of filings is expected to wane as the SEC steps up its scrutiny.
In late March and April, the SEC released statements on issues it says need addressing, including the liability risk SPACs could be incurring on their forward-looking guidance.
The SEC statements don’t have the force of law, but they’re slowing down the market as SPAC executives and investors seek clarity on the SEC's concerns.
Accounting for warrants
In addition to the liability issue, which concerns whether SPACs should adhere to the same quiet period rules of regular IPOs, the SEC has concerns over a number of other matters, including how SPACs are accounting for the warrants they give investors in exchange for becoming shareholders.
SPACs have been treating the warrants, which entitle shareholders to acquire additional shares after the merger closes, as equity. But the SEC says they should be treated as a liability on the company’s balance sheet.
Treating the warrants as a liability is more onerous and expensive administratively because it requires SPACs to undertake a complex valuation process each quarter. As equity, the warrants are only valued once, when they’re issued.
“You have to use a more complex model,” Harris Antoniades, managing director of global investment bank and advisory firm Stout, told CFO Dive.
Forward statements
Valuation accuracy is at the core of the SEC’s concern over forward-looking statements. SPACs are generating such large investor interest in part over what critics believe are unrealistically optimistic growth projections for some of these new business combinations.
Amir Emami and Michael Ventura of RBC Capital Markets have said the market is due for a reset, which the SEC is trying to engineer with its statements, because SPAC valuations are becoming frothy, Reuters reported.
“When there’s a reset,” Ventura said in the Reuters report, “it’s a hard reset. We’re going through that reset right now.”
