SPAC Accounting Crackdown

After breaking records in 2020, the SPAC frenzy has come to a halt. 

Nearly 100 new SPAC deals were issued in March alone, but April has seen just 10 new SPAC deals. 

The slowdown comes after the SEC issued new guidance and announced the new classification of SPACs as liabilities instead of equity instruments. If the SEC’s intentions become law, deals in the pipeline, as well as existing SPACs will have to go back and recalculate their financials for each quarter. 

“SPAC transactions have essentially come to a halt,” said Anthony DeCandido, partner at RSM LLP.  “This is going to cost these companies a lot of money to evaluate and value those warrants each quarter rather than just at the start of the SPAC. Many of these groups lack the sophistication internally to do this themselves.”

Warrants are considered an offer for early investors as compensation for their initial investment, the potential accounting rule change comes as a huge blow to the SPAC market as it could take away the incentives for sponsors and companies to opt for this alternative route to going public. The accounting changes would create a higher level of scrutiny and slow the pace of this typically fast-paced route. 

Also, restating financials could further diminish investor confidence in a market that is already highly volatile and speculative. 

DeCandido also states “…one of the biggest challenges you can face is if you have completed work then you have to go back and do it because it just shows poorly to the outside and evokes the level of public trust you really want. It just further scrutinizes what’s already been a very misunderstood exit plan in SPACs.” 

Another blow to SPACs is that more than 90% of SPACs over the past six years have been audited by just two accounting firms.  This means a significant backlog as SPACs reach to adhere to new accounting rules. 

The new regulations are hitting many SPAC stocks hard. According to CNBC’s SPAC Post Deal Index, stocks that have already completed a SPAC merger within the last two years have experienced losses of more than 20% to date. 

Retail investors may also be having second thoughts on SPACs.  Bank of America reports that retail SPAC buying has slowed down from $120 million weekly in net purchase at the beginning of the year, to single digits in April. 

“Early data from April suggest that retail may be returning back to their ‘traditional’ roots, favoring more established companies over low-priced speculative securities,” Bank of America analysts said in a note on Monday. 

This is the second warning regarding SPACs from the SEC so far in 2021. The first was issued in regards to celebrity-endorsed SPACs.