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.
First and foremost, we want to clear up an important fact that somehow got lost in the SPAC initial public offering frenzy. As we said, the SEC staff merely issued a statement of their observations on the accounting and financial reporting for warrants. Further, as the combined company will need to file the Super 8-K within four business days of closing, the parties must ensure that the restated financial statements and related disclosures will be prepared in time to meet the filing deadline (or postpone the closing until such time as the disclosure will be ready for inclusion in the Super 8-K). First, for pending deals, the staff has indicated that they will not allow registration statements to go effective if the accounting is not considered correct and, if a restatement is needed, until the restatement is complete. In addition, the statement provides a reminder about the obligations of Regulation FD not to selectively disclose material nonpublic information. The Staff Statement states that if the warrants provide that the settlement amount may change based on the characteristics of its holder, the warrants should be classified as liabilities measured at fair value rather than being indexed to the entity’s stock.
- Warrants are common features in SPAC transactions, with SPACs typically selling warrants to their sponsors to help fund their initial costs, and also selling units comprised of shares and warrants at the IPO.
- In contrast, public warrants typically can only be exercised for cash, except in the case of specified redemption scenarios, and are typically subject to redemption by the SPAC.
- During 2019 and 2020, only a handful of federal securities class actions involving SPACs were filed, but in 2021, federal filings involving SPACs became the dominant filing trend.8 Consistent with that overall trend, SPAC filings that include accounting allegations tripled in 2021 as compared to the prior year.
- Grant Thornton International Limited (GTIL) and the member firms, including Grant Thornton LLP and Grant Thornton Advisors LLC, are not a worldwide partnership.
- If the company determines that the accounting error is not material to the required financial statements and disclosures included in pending submissions and filings, the company “may provide the staff with a written representation to that effect in correspondence” on EDGAR.
Existing SPACs and companies that have completed a business combination with a SPAC should consult with their advisors about amending their warrant agreements to make the changes suggested above to avoid future liability accounting. In the absence of such revisions, SPACs will need to undertake actions described above under “Implications of the Statement,” which may result in the warrants being classified as a liability measured at fair value, with changes in fair value reported each period in earnings. The agency’s rapidly growing body of investor alerts, guidance, and public statements suggests that the SEC views SPACs and de-SPAC transactions as posing risks to retail investors and that it has concerns about whether market participants are sufficiently addressing those risks. SPAC sponsors, management, underwriters and accountants should review the SEC’s statements and guidance carefully and work with counsel to understand their implications.
This Alert is intended to help our clients understand the Staff’s position, assess implications and formulate next steps. On April 12, 2021, the SEC issued Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPAC”). The statement highlights potential accounting implications of terms included within many SPAC warrant agreements and provides guidance on what to consider when making the determination between classifying the warrants as equity versus classifying them as a liability. Virtually all SPACs have both public warrants (issued as part of the units sold in the IPO) and private warrants issued to the SPAC sponsors.
SEC focus on SPACs: Key takeaways from recent SEC statements and enforcement activity
The NYSE no longer requires shareholder approval for private placements of more than 20% of a company’s common stock (by number of shares or by voting power) so long as the issuance is made for cash and at a price no less than the Minimum Price, regardless of the number of investors participating in the offering. Centri Business Consulting provides the highest quality advisory consulting services to its clients by being reliable and responsive to their needs. Centri specializes in financial reporting, internal controls, technical accounting research, valuation, mergers & acquisitions, and tax, CFO and HR advisory services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skillsets to ensure the project is completed timely and accurately. 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. And the SEC’s Division of Enforcement is currently investigating at least three other companies that recently went public through de-SPAC transactions.
Facts on SPACs: A focus on warrants, earnouts, and EPS
As more of these cases progress, SPAC cases may play a role in future accounting case settlement trends. Like we said, it’s enough to make someone grimace a bit but nowhere near enough to close up shop. However, between the new valuations, misstatements, restatements, memos, and audits, there’s just a lot of administrative tasks to take care of, not to mention additional costs.
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 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.
While this valuation may enable the SPAC to assess materiality on a quantitative basis, the SPAC should also consider qualitative factors bearing on materiality. Public and Private warrants both commonly contain a provision allowing the warrant holder to redeem the warrant for cash in the event of a tender offer initiated by a third party. While a majority of the common stockholders may sell their shares for cash, it is possible not all common shareholders will be able to. That is, a potential exists for the warrant holders to receive cash consideration from the SPAC when less than 100% of the common stockholders also receive cash when the tender offer is settled. The possibility of this scenario means equity classification is precluded; the likelihood of this situation actually occurring is not relevant to the accounting assessment.
Second, for completed deals, the combined company may need to delay periodic filings while it evaluates these issues and completes a restatement, if required. Any delay in such filings or suspension of existing registration statements could affect the liquidity of securities held by PIPE investors, employees, and others. Pre-IPO SPACs will have the option of revising the terms of their warrants to ensure that they may be classified as equity or revising their registration statement disclosures to reflect the classification of the warrants as a liability. SPACs should anticipate that the process of confirming with the Staff the accounting treatment for alternative warrant structures to avoid classification of warrants as a liability may take some time, at least for the early movers. SPACs should also review their risk factor disclosures and, if not already included, consider adding a risk factor that similar reclassifications, based upon updated or revised accounting guidance or interpretations, could occur in the future. Virtually all existing SPACs with a warrant structure provide that upon a transfer the private warrants lose certain special features (e.g. the non-redeemable feature) and become fungible with the public warrants.
- The April 12 statement, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies, concerned accounting and reporting for warrants issued by SPACs.
- The views expressed in the post are those of Mr. Coates and Mr. Munter, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
- Lastly, entities are encouraged to remain abreast of any further developments on this topic through discussion with their advisors and/or the SEC staff.
- 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.
- While a majority of the common stockholders may sell their shares for cash, it is possible not all common shareholders will be able to.
Grant Thornton International Limited (GTIL) and the member firms, including Grant Thornton LLP and Grant Thornton Advisors LLC, are not a worldwide partnership. GTIL is a non-practicing, international, coordinating entity organized as a private company limited by guarantee incorporated in England and Wales. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. 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. 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. On June 1, 2021, the Staff of the SEC’s Division of Corporation Finance (the “CorpFin Staff”) announced its intent to forego enforcement of proxy rules regarding the treatment of proxy voting advice as proxy solicitations.
Posted by Cydney Posner
According to the Statement, SPACs that determine that the error is not material to the financial statements and disclosures may provide the Staff with a written representation to that effect in correspondence on Edgar. The SPAC should consult with its audit committee as part of the process described above and, once the above evaluation is complete, convene a meeting of the audit committee and its auditors to evaluate any errors to the financial statements and the results of management’s materiality analysis. However, many SPACs had structures with multiple classes of common stock, yet only certain shareholders were eligible to receive cash with the warrant holders in such a transaction.
In-depth analysis, examples and insights to give you an advantage in understanding the requirements and staff statement on accounting and reporting considerations for warrants implications of financial reporting issues. 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. Shareholder approval is required in the case of issuances used to fund an acquisition where the Related Party has a 5% or greater, or a group of Related Parties collectively have a 10% or greater, direct or indirect interest in the company or assets to be acquired or the consideration to be paid.
