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Exclusive-U.S. SEC cracks down a second time on SPAC equity accounting treatment - sources

Exclusive-U.S. SEC cracks down a second time on SPAC equity accounting treatment - sources
Exclusive-U.S. SEC cracks down a second time on SPAC equity accounting treatment - sources   -   Copyright  Thomson Reuters 2021   -  
By Reuters

<div> <p>By Anirban Sen, Chris Prentice and Krystal Hu</p> <p><span class="caps">WASHINGTON</span>/NEW <span class="caps">YORK</span> – Expanding its crackdown on the <span class="caps">SPAC</span> sector, the U.S. Securities and Exchange Commission has told top auditors of blank-check acquisition companies to account more strictly for public shares in these shells, according to multiple industry accountants and lawyers familiar with the change.</p> <p><span class="caps">SEC</span> staff have privately told top auditors of Special Purpose Acquisition Companies, or <span class="caps">SPAC</span>s, that “redeemable” shares issued by these shells must be treated as temporary – known as “mezzanine” – equity, in a break from the long-standing industry practice of treating them as permanent equity, the people said.</p> <p>The change will cause most <span class="caps">SPAC</span>s to fall below the minimum equity capital requirement of Nasdaq’s Capital Market tier, pushing <span class="caps">SPAC</span>s looking to list on Nasdaq to its Global Market tier, which has no equity requirement, the people said.</p> <p>The development marks the second time this year that the <span class="caps">SEC</span> has tightened <span class="caps">SPAC</span> accounting guidance and the latest salvo in the agency’s broader crackdown on the <span class="caps">SPAC</span> deals market, a booming business for Wall Street over the past 18 months.</p> <p>While the long-term implications of the change in listing status for <span class="caps">SPAC</span>s in the pipeline were unclear, some industry attorneys and auditors said it was another worrying sign that the <span class="caps">SEC</span> was looking for ways to upend longstanding practices in the <span class="caps">SPAC</span> market. </p> <p>“It’s a change in accounting treatment and a change in the way the <span class="caps">SEC</span> views the issue,” said Jeffrey Weiner, chief executive of Marcum <span class="caps">LLP</span>, which handles over 40% of <span class="caps">SPAC</span> audit work, according to data from <span class="caps">SPACI</span>nsider. </p> <p><span class="caps">SPAC</span>s are listed shell companies used to take private companies public, sidestepping the more traditional and lengthy initial public offering process. In an era of free-flowing money, more than $100 billion in <span class="caps">SPAC</span> deals have been inked so far this year. </p> <p>With less initial regulatory vetting than <span class="caps">IPO</span>s, the <span class="caps">SEC</span> has said the boom in <span class="caps">SPAC</span> deals puts investors at risk. It has increased scrutiny of the sector, from <span class="caps">SPAC</span> marketing https://www.reuters.com/article/us-sec-spac/sec-warns-against-investing-in-spacs-based-solely-on-celebrity-backing-idUSKBN2B22M5 and fees to disclosures, conflicts of interest and accounting treatment.</p> <p>In April, the <span class="caps">SEC</span> issued guidance https://www.reuters.com/business/legal/us-securities-regulator-issues-accounting-guidance-spacs-2021-04-13 suggesting hundreds of <span class="caps">SPAC</span>s should account for equity warrants as debt, putting a damper on the market and driving efforts https://www.reuters.com/business/wall-street-grapples-with-new-spac-equity-contracts-after-regulator-crackdown-2021-06-08 to test new contracts.</p> <p>In recent months, <span class="caps">SEC</span> staff have also questioned whether redeemable shares in the listed <span class="caps">SPAC</span> shell should be treated as permanent equity, since shareholders have the right to sell those back to the <span class="caps">SPAC</span> if they do not like the deal it proposes. </p> <p>In recent weeks, the <span class="caps">SEC</span> has told the auditors in private discussions that they should treat those redeemable shares entirely as “temporary equity,” the sources said.</p> <p>The <span class="caps">SEC</span>’s new stance is in line with its official guidance on how to treat redeemable shares and Generally Accepted Accounting Principles. </p> <p>However, because of the unique terms of some <span class="caps">SPAC</span> charters, which require they hold a minimum permanent equity balance of $5 million, <span class="caps">SPAC</span> auditors had long treated redeemable shares as permanent equity in order to meet that threshold, without objection from the <span class="caps">SEC</span>, the people said. </p> <p>“The current accounting treatment had been in place and accepted for years,” said Marcum’s Weiner. He said some Marcum partners have spoken with <span class="caps">SEC</span> staff about the issue.</p> <p>Other major <span class="caps">SPAC</span> auditors include Withum and <span class="caps">KPMG</span>. Spokespeople for the two companies declined to comment.</p> <p>The sources said it was unclear if the <span class="caps">SEC</span> would issue public guidance on the issue. The regulator declined to comment. </p> <p><span class="caps">LISTINGS</span> <span class="caps">CHANGE</span> </p> <p>A Nasdaq spokesperson confirmed that the accounting change had forced <span class="caps">SPAC</span>s to switch their planned listings from its Capital Market to its Global Market.</p> <p>While the <span class="caps">SEC</span>’s new stance is unlikely to be as disruptive for the <span class="caps">SPAC</span> industry as its April guidance, it is creating a headache for Nasdaq. <span class="caps">SPAC</span>s have traditionally listed on its Capital Market, which is generally for companies focused on capital raising and which has minimum capital requirements.</p> <p>While its Global Market has no minimum capital requirement, it does require <span class="caps">SPAC</span>s to have 400 shareholders, 100 more than the Capital Market, which could be problematic for some <span class="caps">SPAC</span>s.</p> <p>Nasdaq is working on a rule change that would allow companies to list on the Global Market with 300 shareholders, the spokesperson said. It was unclear when that would come into effect.</p> <p>Currently, nine <span class="caps">SPAC</span>s trade on the Global Market, according to Nasdaq data, all of which listed since June 2021, when the <span class="caps">SEC</span> began to question the treatment of redeemable shares.</p> <p/> </div>