During the first quarter of this year, 247 special purpose acquisition companies (SPACs) filed for IPOs, “demonstrating the explosive growth of the SPAC market,” a report by Duff & Phelps said.
Currently, 433 SPACs are seeking acquisition targets, representing more than $125 billion in IPO proceeds, Duff & Phelps said, noting that since January 1, 89 de-SPAC deals have been completed, totaling more than $145 billion of transaction enterprise value. A SPAC reaches the "de-SPAC" stage after the target company has been identified and the merger deal negotiated.
“SPAC IPO activity continued to climb well past record highs, with the number of IPOs during 2020 nearly 4x the 2019 total and the first quarter of 2021 alone eclipsing the previously record setting 2020 totals,” Duff & Phelps said.
Companies are seizing on the SPAC merger process as a faster and cheaper method for going public than a traditional IPO.
The Securities and Exchange Commission (SEC) this month issued guidance cautioning companies about the accounting treatment of SPAC warrants and the liability risk of forward-looking disclosures.
The SEC is “continuing to look carefully at filings and disclosures by SPACs and their private targets,” John Coates, the SEC’s acting director of corporate finance, said in an April 8 statement.
Companies acquired by a SPAC can expect a fast timeframe for going public, requiring them to quickly ramp up reporting capabilities and internal controls or risk compliance problems, SEC Acting Chief Accountant Paul Munter said in a March 31 statement.
“A private company may spend years preparing to transition to a public company in a traditional IPO,” he said, noting SPAC targets often have only a few months to make the same preparations.
“We encourage stakeholders to consider the risks, complexities, and challenges related to SPAC mergers,” he said.
SEC staff said in an April 12 statement that SPAC warrants, depending on their terms, shouldn’t be treated as equity investments, but as liabilities.
“The warrants should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings,” the staff statement said. “While the specific terms of such warrants can vary, we understand that certain features of warrants issued in SPAC transactions may be common across many entities.”
Duff & Phelps said “SPACs that have misclassified their warrants as equity may be required to restate their financial results if the impact is deemed material.” It said that in light of the SEC’s April 12 statement, SPACs should do the following:
“Talk to your auditor to determine if the current accounting treatment of warrants issued in connection with your SPACs formation and initial registered offering is appropriate in light of the new SEC staff statement
If you determine with your auditor that the warrants were misclassified as equity, obtain an independent valuation for the IPO date and subsequent quarter ends; then, discuss with your auditor appropriate changes to previously issued financial statements
On a prospective basis every quarter, estimate the fair value of the warrant liability.”