On April 12, 2021, the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), which highlighted a number of important financial reporting considerations for SPACs. Most notably, the statement describes two fact patterns that are common in warrants issued in connection with a SPAC’s formation and initial registered offering. Regardless of SPAC lifecycle stage or materiality, the registrant should consider evaluating its internal control over financial reporting and disclosure controls and procedures to determine whether the controls are adequate in light of the error. The registrant should consider whether its prior evaluations should be revised in any amended filings that will need to be made, and should analyze whether there is a control deficiency and the severity of any control deficiency identified.
These companies — commonly referred to as “de-SPAC’d companies” — must perform the same analysis of their warrant structure and consider the implications of “equity” versus “liability” treatment on each fiscal period reflected in their financial statements. The materiality analysis under SAB 99 and other relevant guidance may be somewhat easier in the case of a de-SPAC’d company given its much larger size as compared to the original SPAC. Even if a de-SPAC’d company can avoid a restatement for periods after its initial business combination, the Statement also has implications for each fiscal period reflected in the financial statements. Therefore, even if the difference in warrant treatment is not material for one or more periods post-business combination, the de-SPAC’d company may still be required to restate its financial statements for earlier periods (i.e., pre-deSPAC). The consequence is that de-SPAC’d companies may have to (1) pause the use of resale registration statements, (2) postpone the filing, or pause the use of, other registration statements and (3) notify investors of non-reliance on previously issued financial statements under Item 4.02 of Form 8-K.
Each of these investigations was commenced shortly after the de-SPAC transaction closed and each appears to have been prompted by short seller reports asserting that the company made false and misleading statements leading up to its SPAC merger. Over the past several months, the Securities and Exchange Commission (SEC) has increasingly focused on special purpose acquisition companies (SPACs), issuing a series of investor alerts, disclosure guidance, and public statements alerting the public and market participants to potential issues in SPAC transactions. The SEC’s Enforcement Division also has weighed in, launching several SPAC-related investigations.
A Fireside Chat with CFGI Board Member, Former SEC Chair Jay Clayton and CFGI CEO Shane Caiazzo
As for materiality itself, some businesses supported the materiality of climate-related disclosures, while others encouraged the SEC to require company-specific assessments rather than a generic approach. Our accounting gurus can address the restatements, memos, and other responsibilities suddenly staring most SPACs in the face. Also, in what might be the best news you’ll hear all day, our new Valuation Practice is now officially rolling. And if you’re at all familiar with our unique brand of cost-effective expertise, that’s reason enough to jump for joy.
SPAC filings that include accounting allegations tripled in 2021 as compared to the prior year. So now that we have that critical tidbit out of the way, let’s take a look at the ASC 815 guidance, what it says about these warrants, and what all of this means for everyone’s favorite blank check companies going forward. In other words, the SEC only clarified and reminded people of the GAAP guidance that was already in place.
The Impact of the Recent SEC Staff Statement on Accounting and Reporting Considerations for Warrants Issued by SPACs
- We are uniquely positioned to assist with technical accounting assessments, SAB 99 memos, valuation analysis and all reporting requirements.
- Regardless of whether a restatement is required, companies should also re-evaluate their obligation to maintain ICFR and DCP, as well as whether there were any deficiencies in their existing controls procedures and processes that may need to be disclosed and whether and to what extent improvements to ICFR and DCP should be implemented.
- If any new regulatory action includes the exemption conditions and compliance date set forth in the 2020 amendments, the CorpFin Staff will not recommend any enforcement based on those conditions for a reasonable period of time after the resumption of the ISS challenge.
Now, impacted SPACs must reclassify – in many cases restate – those warrants as liabilities rather than equity shares. Most of the braking action concerns a staff statement from the good folks at the Securities and Exchange Commission regarding the accounting treatment and reporting considerations for warrants. And while that statement was certainly enough of a jolt for everyone to hit pause for a moment, it doesn’t imply SPACs are about to cave in on themselves.
- Second, for completed deals, the combined company may need to delay periodic filings while it evaluates these issues and completes a restatement, if required.
- In this fact pattern, the warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant.
- Each of these investigations was commenced shortly after the de-SPAC transaction closed and each appears to have been prompted by short seller reports asserting that the company made false and misleading statements leading up to its SPAC merger.
- Press reports indicate that the SEC’s Division of Enforcement has contacted various investment banks seeking voluntary information related to SPAC transactions on topics such as deal fees, volume, compliance, reporting and internal controls.
- If the Form S-4 is effective but the required shareholder meetings have not yet occurred, the restated financial statements and updated disclosures, including the pro formas and updates to MD&A and risk factors, should be provided in the form of a filing under Rule 425.
- While the CorpFin Staff considers whether to revisit the 2019 guidance and 2020 amendment and issue further regulatory action, it will not recommend enforcement actions.
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These latter warrants are presented as an added benefit for the initial SPAC investors, who may be required to wait as many as 18 to 24 months for the SPAC to enter into a business combination with an operating company. Historically, many SPACs, with the support of several accounting firms, have classified the warrants as part of equity of the entity. Generally Accepted Accounting Principles (GAAP), Acting Director Coates and Acting Chief Accountant Munter indicate that warrants with certain features that are common in SPACs should probably more rightly be classified as a liability.
If considered acceptable – and they met other equity classification requirements – the SPAC would fair value the warrants at issuance and classify them as equity on the balance sheet. Reclassifying SPAC warrants as liabilities instead of equity instruments removes key incentives and flexibility that underpin the recent exponential growth of the SPAC market. In connection with the surge in transactions involving special purpose acquisition companies (SPACs), the SEC has turned its focus to SPAC-related matters, releasing several statements entities should consider. Disclaimer This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as «Cooley»). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction, and you should not act or refrain from acting based on this content.
We are issuing this statement to highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions and to discuss the financial reporting considerations that apply if a registrant and its auditors determine there is an error in any previously-filed financial statements. Securities and Exchange Commission (SEC) published a joint statement by John Coates, Acting Director of the Division of Corporation Finance, and Paul Munter, Acting Chief Accountant, which provides their view on the accounting treatment of warrants issued by special purpose acquisition companies (SPACs). This statement, titled Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs),1 suggests that the SEC staff has concerns that the warrants issued by many SPACs should be properly accounted for under the liability method on the balance sheet.
In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), staff statement on accounting and reporting considerations for warrants all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings. If a SPAC has filed a Form S-4 registration statement (the Form S-4) in connection with a business combination but the Form S-4 is not yet effective, then the SPAC should follow the steps outlined above regarding a SPAC that is already public and is in the de-SPAC process (whether looking for a merger partner or in discussions regarding a BCA). If the business combination has already closed, the post-de-SPAC combined company must undertake the same analysis as staff statement on accounting and reporting considerations for warrants that of an already public SPAC, including as described under “Why is this creating such an issue? ” and “What if the SPAC or post-de-SPAC combined company cannot file the periodic report by the extended deadline? ” From a materiality perspective, it is possible that the post-de-SPAC combined company could conclude the error is immaterial, given that the post-de-SPAC combined company is typically larger than the SPAC and as such, the threshold for materiality may be higher.
As such, the staff advises that companies with these outstanding warrants (whether SPACs or the combined company following a de-SPAC transaction) consider the need to amend previously-filed audited and unaudited financial statements. The volume and market value of SPAC transactions (including de-SPAC business combinations) have been significantly impacted in the immediate aftermath of the Staff Statement. There is some sentiment that while it will cause people to hit “pause” on SPAC transactions and result in restatements and transaction delays, it may not have a long-term significant dampening effect on the SPAC market generally. If the warrants were previously classified as equity but should have been accounted for as debt, then companies should work in close coordination with counsel and their independent auditors in order to determine what periods may require fair value determinations, and whether those determinations will need to be performed by valuation specialists.
Antitrust enforcers are expected to increase their scrutiny of vertical mergers, being mergers involving companies at different levels of the supply chain. Most vertical mergers will likely not present competitive concerns and will not attract lengthy agency investigation. As the SEC sharpens its focus on climate- and ESG-related disclosures, and in the wake of the end of the public comment period, the prospect of additional rulemaking continues to increase, and SEC staff has indicated that it could occur soon. SPACs that are in the de-SPAC process will also need to consider the impact that a misstatement may have on S-4, proxy and other SEC filings. In addition, once the decision to restate is made but before the public announcement, the SPAC should contact its securities exchange. According to the Statement, SPACs that determine that the error is not material may provide the Staff with a written representation to that effect in correspondence on Edgar.
SPACs should adjust transaction timelines in order to properly account for any updates to the Form S-4 in response to the Statement as detailed below. In addition, the settlement amount for the sponsor vs. a third party may differ in a reorganization or change of control transaction. The Private Warrants often state their fair value will be determined based upon a capped American call option to determine a strike price adjustment. However, the contract also states other provisions in the agreement that are specific to the sponsor “shall be taken into account.” We understand some entities and their advisors have concluded this proviso means the fair value would be determined based on an uncapped call option, which would be greater than a valuation based upon a capped call option.
The rule change allows for primary direct listings to occur alone or together with a secondary direct listing. Following a de-SPAC transaction, the resulting public company inherits the SPAC warrants and may also be affected by this issue. Below, we address in turn the specific considerations that are relevant if a restatement may be required, as well as specific decisions that may be faced by SPACs based on where they are in their life cycle. This Cornerstone Research report compares accounting case filings and settlements to overall securities class action trends. Because filings of SPAC cases have largely occurred very recently, based on our research only one of these cases had reached settlement as of the end of 2021, and this case included accounting allegations.
