ZeroHedge has posted an article about SPAC. SPAC stands for Special Purpose Acquisition Company. Create a paper company with no actual business, list it, and acquire an appropriate company with the funds collected at the time of listing. Suppose the fund’s founder is a celebrity. In that case, they will quickly collect the funds, and the IPO examination process will be simpler than that of a standard business company, which makes the SPAC scheme popular.
According to this list, $ 153.8 billion is the market capitalization of 437 stocks listed by SPAC, but the reality is unclear. The funds raised by this SPAC scheme were $ 13 billion (52 cases) in 2019, $ 76 billion (227 cases) in 2020, and $ 44 billion (144 cases) in the first quarter alone in 2021.
Bloomberg reports that the SEC (Securities and Exchange Commission) may not consider warrants issued to early SPAC investors as equity instruments. A warrant is like a call option. It is issued, bought, and sold as a right to purchase shares at a strike price within a certain period. Equity instrument refers to a certificate of rights as a shareholder. Most simply, it is common stock, but it may also include preferred stock and receivables with stock conversion rights. Warrants were also included in the SPAC scheme’s equity instrument, but the SEC has doubts about this treatment.
That is, the SEC’s position is that the fund raised in warrants should be regarded as a liability. In that case, the capital adequacy ratio and return on equity of SPAC will drop, and it would not be easy to fulfill the criteria for listing.
Shortly after Bloomberg’s coverage, the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)
The content mainly consists of three points: “Indexation(under “Accounting Concerns,” Tender Offer Provisions,” and “Registrant Filing Considerations.”
The item “Accounting Concerns” says:
“U.S. Generally Accepted Accounting Principles (“GAAP”) includes guidance that entities must consider in determining whether to classify contracts that may be settled in its stock, such as warrants, as equity of the entity or as an asset or liability.”
https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs
In other words, the issue is about whether to classify the raised funds as a liability or as a net asset.
An equity-linked financial instrument (or embedded feature) must be considered indexed to an entity’s own stock in order to qualify for equity classification.[5] While many instruments include a fixed strike price or a fixed number of shares used to calculate the settlement amount, other instruments may include variables that could affect the settlement amount. Such variables do not preclude a conclusion that the instrument is indexed to an entity’s own stock if the variables would be inputs to the fair value of a fixed-for-fixed forward or option on equity shares. To assist in an entity’s evaluation, GAAP includes a list of such inputs
https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs
In short, the SEC claims that “if the strike price and the number of shares to be allocated are not fixed in advance when issuing a warrant (call option), such a warrant should not be classified as a net asset for accounting purposes.” Funds raised by financing means that are not entirely tied to already issued treasury stock (net assets) should not be considered net assets. And since the warrants used in the SPAC scheme have no fixed exercise price, they should be regarded as debt valued at a fair price.
Next is the “Tender Offer Provisions.” Under the Tender Offer Provisions of the SPAC scheme, the owner of a warrant always receives cash, while only part of the owner of the shares that are the underlying assets of the warrant receive cash. Under these circumstances, warrants are debt funds and should be marked to market during each business period.
And finally, there are concerns about documents already filed. Based on the Securities Exchange Act of 1934, if the preceding two paragraphs’ problems are correct, it may be necessary to make significant revisions to the already submitted financial statements. We will have to be careful about what happens in the future.