SEC to SPACs: Blank-Check Path to IPO, Warrants, Disclosures Have Liability Risk

By: Francis Mainville


The SEC has caught up with the SPAC boom in its recent issuance of a flurry of guidance surrounding the blank-check structure as a path to the IPO market. Regulators are looking carefully at special purpose acquisition company filings and disclosures, as well as that of their private company targets. In the crosshairs of the reviewer’s recent guidance is, most specifically, on recognizing Public and Private Placement Warrants and forward purchase agreements between early investors/sponsors as liabilities for financial reporting purposes.

Warrant Accounting & Valuations

Following the SEC’s statement, an avalanche of clients needed immediate support and guidance from their valuation teams in early April. The need was highest from SPACs that have completed their IPOs and those with de-SPAC completions in cases where a definitive agreement with a target entity exists with closing a transaction dependent on filing updated financial statements with the SEC.

As warrant agreements have come into regulatory and audit view, analysis has uncovered some very technical provisions that either change the value of the warrants (depending upon the holder) or may require cash settlement in certain situations. Regardless of how remote such a triggering situation may be, these unusual settlement provisions drive a liability rather than equity classification. The liability reclassification is considered substantial and material, requiring a restatement of previously filed financial statements both now and at quarter’s end for each reporting period. As such, the warrants need to be valued.

If a SPAC has not yet completed its IPO, its board and sponsors may want to consider proactively accounting for warrants as liabilities. They may also want to take a deeper dive into the structure of the warrants’ features to uncover and adjust provisions that are likely to trigger the necessary reclassification.

In VRC’s opinion and experience, the SEC’s focus on warrant agreements within SPACs serves as a reminder that while this approach may avoid the traditional IPO “marathon” of taking a company public, it is not to be treated as a straight sprint. Perhaps in more rapid succession than it occurs with pre-IPO planning, milestones may need to be established to ensure the SPAC avoids significant pitfalls and consequences from accounting, financial reporting, and valuation perspectives.

Engaging with a third-party valuation firm’s seasoned complex securities team that can deliver expert analysis using an established Monte Carlo Simulation or Black Scholes model, a SPAC client should be ready to disclose the fair value of Public and Private Placement Warrants:

  1. At the time of IPO, and
  2. Quarterly thereafter.

Why the Sudden SPAC-Attack?

SPACs aren’t a new concept and the SEC’s April attention wasn’t so sudden.

The history of the structure is purported to have started in the 1990s and grew in popularity in the early 2000s as a way to secure alternative equity capital. It was just last year, though, that SPAC IPO filings exploded, drawing interest from celebrities, politicos, and investment execs alike. The structure has also attracted some interest from the private equity space, with 26% of fund managers viewing a SPAC as a viable exit strategy, as reported in Preqin’s November 2020 fund manager survey. According to SPACInsider, gross proceeds for 2020’s total of 248 SPAC IPOs stood at an annual record, passing $83 billion and dwarfing the figures of 2019 and 2018 ($13.6 billion and $10.7 billion, respectively).

As of May 5, 2021, special purpose acquisition company IPOs number a total of 313, with gross proceeds tipping just over $101 billion. But, as excessive as the amount is, it also seems to reveal a slowing market likely related to the considerations SPACs must now consider following the SEC’s early April announcements. And as the dust settles on this first pique of regulatory interest, it could also push more air out of the once surging SPAC bubble.

It does seem that the SEC’s April statements won’t be the last we will hear from the market watchdog. In John Coates’ public statement, he is unequivocal in pointing out that “with the unprecedented surge has come unprecedented scrutiny and new issues with both standard and innovative SPAC structures keep surfacing.”

April’s flurry of restatement needs has calmed at least for now, but the SEC has been clear that they will continue to keep a close watch on SPAC filings and disclosures and their private targets to ensure investors have clear information to make informed investment decisions. We believe there will be more to come but whether or not the SEC’s ongoing views and likely coming guidance will create a decline in popularity of the vehicle is yet to be seen and measured.

Establish Best Practices

VRC reacted quickly to its clients to meet the immediate restatement need. In doing so, our firm has also established best practices in developing and applying a consistent valuation model that meets the client’s valuation need, restatement requirements, and ongoing quarterly filing requirements. The model also considers the unique triggers, risks, and situations for each SPAC and the requirements of its auditors.

This uptick in regulatory attention should also serve as a reminder to SPAC issuers. The time is always right to review and reassess internal controls and valuation procedures. As private companies continue the path to IPO – whether via a SPAC or traditional IPO – it is prudent to ensure the conclusions of that review are well-documented for public reporting purposes.

It is also essential to remain mindful that a boom in deal activity can also turn into a bust of litigious action. SPACs, its boards, sponsors, and advisors may also want to take steps to seek the independent advisory services of a fairness opinion provider.

Finally, while SPACs may appear as an IPO fast-track, which seems to connote the process is “simple” or “easy,” rest-assured that a SPAC structure is complex. The same complexity exists within the viewpoint of the valuation professional. While the fundamental structural differences between share types in a SPAC appear straightforward, the valuation becomes more complex, particularly when a deal is on the table.

With or without regulator and rulemaking commentary, SPACs present significant valuation challenges that often require outside expertise.

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