SEC Revisits SPAC Accounting
The SEC statement summarized below may impact the timelines of SPAC IPOs currently in process. Where relevant, companies should work closely with their advisors, auditors, attorneys, and bankers to review their accounting for complex financial instruments that may be common to SPACs. Riveron will provide ongoing pertinent updates.
On Monday, April 12, 2021, the Securities and Exchange Commission issued a statement that will likely impact the accounting, reporting and balance sheet classification of public and private warrant programs often issued in SPAC IPOs. Instead of the current equity classification, the initial impact suggests that most warrants should be accounted for, and reported as, liabilities on SPAC balance sheets.
As of April 12, 2021, the new SEC statement may have significant impacts to SPAC-related timelines.
Also, for each reporting period, a GAAP valuation may be necessary to determine the fair value of the warrants  —if classified as a liability reporting would start with the company’s Form S-1 capitalization table and IPO audited Form 8-K balance sheet.
Revisiting the warrant accounting and reporting is likely to delay IPO timelines for SPACs currently in the pipeline, which have become increasingly popular in recent months. Given the prevalence of SPACs, the SEC statement is intended to improve financial reporting quality and transparency as the investing public becomes more entrenched with these vehicles.
Revisiting SPAC accounting: a summary of the SEC’s latest statement
The SEC recently evaluated two different fact patterns and concluded that both the public and private warrants in these fact patterns should be accounted for as liabilities. The SEC points to two provisions (there may be others) in the warrant agreements that would cause liability accounting:
- Indexation: This refers to the variability in the settlement provisions if less than 70% of the consideration is in the form of listed shares and if the warrants are exercised within 30 days of public disclosure. In such case, there is an adjustment to the exercise price that utilizes a Black-Scholes Warrant Value, which would differ depending on whether the warrants are held by the Sponsor (or permitted transferees) or anyone else (also referred to as Private Warrants and Public Warrants, respectively). The SEC statement suggests that the existence of this provision causes the Private Warrants to be accounted for as a derivative liability (with fair value adjustments at each reporting period).
- Tender Offer Provisions: This refers to the potential settlement of the warrants (which could include a cash settlement) under terms that may be different than the settlement with each of the holders of common stock. The SEC believes that the existence of this provision would cause derivative liability accounting for both Private and Public Warrants.
Impacted companies should work closely with advisors, auditors, bankers, and attorneys to appropriately analyze the accounting for the SPAC warrant agreements and to develop the required documentation to support related conclusions.
 Definitions for terms or acronyms included above: GAAP – generally accepted accounting principles; IPO – initial public offering; SPAC – special purpose acquisition company.
 As reported here, warrants are a standard component of raising money via SPACs, typically shown on balance sheets as equity. If classified instead as liabilities, it would require a company to periodically account for changes in the value of warrants.