The SEC Is Cracking Down On SPAC Accounting Yet Again

Tyler Durden's Photo
by Tyler Durden
Thursday, Sep 30, 2021 - 05:45 AM

Now that almost everybody in the world - including investment banks, celebrities and what seems like just random drifters off the street - have made a fortune lopping some type of trash onto the market in the form of a SPAC deal, it appears the SEC is finally cracking down on the "boom". 

The SEC has now reportedly told top auditors of blank check acquisition companies to "account more strictly for public shares in these shells", according to a Reuters exclusive on the matter. SEC staff is in the midst of telling auditors of Special Purpose Acquisition Companies that “redeemable” shares must be treated as temporary equity. They had previously been treated as permanent equity.

The change is going to cause most SPACs to fall below the equity capital requirement of Nasdaq’s Capital Market tier, Reuters reported. This will push SPACs looking to list on NASDAQ to its Global Market tier. The Global Market tier has no minimum equity requirement but does require SPACs to have 400 shareholders, which is 100 more than NASDAQ's Capital Market tier. 

Reuters detailed the issue further:

The SEC’s new stance is in line with its official guidance on how to treat redeemable shares and Generally Accepted Accounting Principles.

However, because of the unique terms of some SPAC charters, which require they hold a minimum permanent equity balance of $5 million, SPAC auditors had long treated redeemable shares as permanent equity in order to meet that threshold, without objection from the SEC, the people said.

Jeffrey Weiner, chief executive of Marcum LLP, told Reuters: “It’s a change in accounting treatment and a change in the way the SEC views the issue.”

“The current accounting treatment had been in place and accepted for years,” he continued.

Currently only nine SPACs trade on the Global Market tier. 

As we noted back in April, the SEC had previously made the change that resulted in warrants, which are issued to early investors in the deals, not being considered equity instruments. Bloomberg explained earlier this year:

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.

The proposed changes could result in warrants being considered a liability for accounting purposes, according to the Marcum note. The shift would spell a massive nuisance for accountants and lawyers, who are hired to ensured SPACs are in compliance with the agency.

Meanwhile, has anyone seen this guy lately?