BEST PRACTICE Newsletter – April 2021

SEC HITS PAUSE BUTTON ON SPAC FRENZY-

After months of scrutiny over the SPAC frenzy, the SEC has issued new guidance that will effectively curb the number of new SPAC filings now flooding the market. The guidance states that due to the nature of certain terms and features of warrants typically issued in SPAC transactions, certain warrants may not be considered equity, but rather as liabilities on the balance sheet.

The guidance has effectively thrown a wet blanket on new SPAC filings, with only 10 SPACs filed to date in April, compared to 109 deals in March alone, according to industry monitor SPAC Research.

Under this guidance, SPACs, or Special Purpose Acquisition Companies, will be required to record certain warrants as a liability at issuance and to recalculate the value on a quarterly basis in their 10-Ks and 10-Qs, with recalculations required both leading up to and after a combination agreement has been announced.

This new accounting consideration is expected to trigger financial restatements of SPACs that are already public and where warrants have not been exercised or redeemed, thus creating additional costs and headaches for SPAC management.

 CNBC is reporting that “Many SPAC stocks are in a free fall amid the regulatory hit,” with the CNBC SPAC Post Deal Index falling more than 20% year-to-date as of market close on April 20, wiping out 2021 gains.

According to Weinberg’s Corey Fischer, “The SEC’s guidance has added an unexpected level of complexity, effectively pushing the pause button on SPACs. This may cause underwriters to rethink future deals, including SPACs structured without warrants.”

In a SPAC, early investors purchase units which include both a share of common stock and warrants to purchase shares at a later date. The warrants are issued to entice early investors in the deal, including mom-and-pop investors, who have recently rushed into the SPAC market. The SPAC management teams, known as sponsors, also typically are given warrants as an incentive to find a target.

The SEC’s move to reclassify certain warrants as liabilities culminated after months of voiced concerns that investors, particularly small investors, may not be fully informed of the potential risks associated with blank check companies.

Bloomberg has reported that the move “threatens to disrupt filings for new special purpose acquisition companies until the issue is resolved.”

In its April 12 statement, the SEC’s John Coates, Acting Director, Division of Corporate Finance, and Paul Munter, Acting Chief Accountant, said, “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.”

They noted that, “SEC staff had evaluated warrants issued by a SPAC and noted that warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder.”

“Because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares, in this fact pattern, such a provision would preclude the warrants from being indexed to the entity’s stock, and thus the warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings,” they added.

SPAC Research has reported that 308 new US SPAC IPOs have been issued this year alone raising nearly $325 billion. That compares to 248 SPAC IPOs which raised $83.4 billion in all 12 months of 2020. This industry tracker also reports that there currently exists a total of 559 active SPACs which have raised $179.2 billion.

For months, the SEC has been sending signals that SPACs are high on its radar. On April 8, SEC Director Coates issued a statement saying that “Shareholder advocates—as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts—are sounding alarms about the surge.” He warned Wall Street against thinking that SPACs provided a way to skirt securities laws and signaled that the SEC would scrutinize SPACs with the same thoroughness as it does a traditional IPO.

PCAOB Creates Advisory Board for Standards

In an effort to gain input from stakeholders affected by its decisions, the Public Company Accounting Oversight Board (PCAOB) has formed a new advisory group that will provide input on its standard-setting initiatives.

The 18-member expert body, called the Standards Advisory Group (SAG), will consist of five investors, four audit professionals, three audit committee members or directors, three financial reporting oversight personnel, and three academics and others with specialized knowledge.

Members of the SAG will serve two-year terms and will advise the PCAOB on existing and proposed auditing, attestation, quality control, ethics, and independence standards, as well as requested matters of significance to the Board.

In the press release announcing the SAG formation PCAOB Chairman William D. Dunkhe III said the Board’s objective “extends the dialogue we’ve advanced with investors and others since 2018 and gives stakeholders additional and tangible opportunities to assist the Board in accomplishing its mission.”

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SURVEY SAYS…

Majority of Voters OK with Hiking Corp Taxes

New polling of registered voters shows that more than 3 in 5 support corporate tax hikes to fund President Biden’s proposed $2 trillion infrastructure plan.

Conducted in early April by Morning Consult/Politico, the poll found that 65 percent of registered voters, including Democrats, Republicans, and Independents, either “strongly support” or “somewhat support” funding the infrastructure spending through 15 years of corporate tax hikes, while 21% either “somewhat” or “strongly” opposed it.

Among registered Democrats, 85% either “strongly” or “somewhat” supported the corporate tax hikes, with just 4% “somewhat” opposing.

Republicans were split on corporate tax hikes, with a total of 42% in the “strongly” or “somewhat” support category and a total of 47% in the opposition. Of those opposing, 31% “strongly opposed” corporate tax hikes.

The poll, conducted April 2-4, 2021, surveyed 1,989 registered voters and has a margin of error of two percentage points.