WASHINGTON – Some special purpose vehicles are misreporting warrants sold or given to investors, securities regulators said Monday, stepping up inspections of popular vehicles.
Warrants are a standard part of the way SPAC raises money, including from hedge funds and other private investors. The potential return for early investors in SPAC is huge if the company’s shares increase due to various characteristics of the structure, including warrants, which entitle some investors to buy more shares at a predetermined price in the future.
SPACs are blank check companies that raise money from the public in order to buy a business and make it public. If a transaction occurs, the target company takes SPAC̵
SPACs generally classify warrants in their balance sheets as equity. Under certain circumstances, they must be classified as liabilities, which will require the company to periodically report changes in the value of warrants, according to a statement from the Securities and Exchange Commission released late Monday. One impact of the SEC announcement: Affected SPACs need to recalculate their financial results if the fluctuations are considered significant, the SEC said.
The Wall Street ranger has begun to look more closely at the market as SPACs have grown this year, raising nearly $ 100 billion. A senior SEC official said last week that SPACs may not have any regulatory advantages over standard public offering, signaling that the agency will address the shortcomings in the same way that IPOs do.
The SEC did not say in a statement how it came to review the accounting treatment of warrants that have been part of the SPAC for decades. A person familiar with the matter said the agency had received questions from a SPAC about how generally accepted accounting principles require an assessment of warrants and regulators dug into it. SPAC’s financial statements have typically been audited by smaller accounting firms, rather than by the Big Four firms that review the books of most large public companies.
On Monday, the SEC did not say how much the SPAC would be affected by its opinion on the warrants. But she suggests that more than a handful will have to comply with her statement.
Not all SPACs will be affected, but many will, the SEC said in a statement. “Although the specific terms of such warrants may vary, we understand that certain characteristics of warrants issued in SPAC transactions may be common to many entities,” wrote the acting corporate finance director and acting director. Chief Accountant.
These features include warrants that may be settled differently for some holders, such as warrants that can be exchanged for cash rather than shares. They also include redemption warrants, which vary depending on who the holder is – such as a richer return for SPAC founders or early investors than for public shareholders.
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Appears in print on April 13, 2021 as “SPAC Warrants Draw SEC Scrutiny”.