Extension requests, delisting notifications and refiled financials are beginning to litter the SPAC market.
Weeks after officials at the U.S. Securities and Exchange Commission tripped up the blank-check bonanza with new guidance on how to account for warrants, some special purpose acquisition companies have finally managed to wrap their heads around the fallout, while hundreds more continue to work through how the statement affects them.
Chamath Palihapitiya's Social Capital Hedosophia Holdings Corp. V, which has struck a deal to take Social Finance Inc. public, is one of the handful of companies that have announced they will restate their financial statements after evaluating whether their warrants needed treatment as equity or liability on their balance sheets. Others like GX Acquisition Corp., one of the oldest SPACs on the market, have had to ask investors for more time to assess the damage. The Jay Bloom-run SPAC recently requested more time to complete its pending merger with Celularity Inc. to deal with the new guidance, later announcing it will restate its annual financial statements. Even companies that went public through a reverse merger with a SPAC, like Virgin Galactic Holdings Inc. and BurgerFi International Inc., are grappling with the changes. Both companies had to delay their latest earnings reports to make sense of the new warrant accounting guidance.
"Any filing for any SPAC ever in existence that has warrants was stopped dead in its tracks" by the SEC's statement, said David Larsen, a managing director in Duff & Phelps' alternative asset advisory practice, in an interview. "The entire SPAC ecosystem has been shut down effectively to be able to reevaluate this accounting and fix it before the engine can start back up again."
Issued April 12, the SEC statement marked the latest wrench in the gears of the 2021 SPAC boom. The once scalding-hot market had already come under pressure over the prior two months from mounting investor fatigue after a flood of blank-check companies went public. One exchange-traded fund that tracks SPACs, the Defiance Next Gen SPAC Derived ETF, had fallen more than 25% from its mid-February high. Then, SEC Acting Chief Accountant Paul Munter and Acting Director of the Division of Corporation Finance John Coates issued a joint statement challenging the industrywide standard of SPACs accounting for warrants as equity, rather than as liabilities. Most recently, Reuters reported the regulator is considering cracking down on the rosy earnings projections that SPACs and their target companies issue when announcing a deal.
Warrants play a critical part in the SPAC equation. The contracts, given to both early and public-market investors, allow their holder to buy more shares in the future at a particular price, creating more incentive for betting on the blank-check company's prospects of successfully completing a deal. Up until the SEC's statement, those warrants had widely been accounted for on SPAC balance sheets as equity. The new guidance has led lawyers, auditors, bankers and sponsors to scramble to figure out what, if anything, each SPAC needs to do about its warrants.
SPACs are having varied reactions to the SEC's statement largely because of where they are in their life cycles. A SPAC that has filed to go public but whose registration statement has not become effective may only have to refile an amended S-1 with regulators. On the other hand, a company that has already done a SPAC merger and is trading in the public markets on its own is facing the possibility of having to review and potentially amend each and every one of its earnings statements, if the resulting impact of their warrants becoming liabilities is material.
"It has opened a huge restatement Pandora's box," Larsen said.
The SEC statement has led to a dramatic drop-off in new listings in April. Just 13 blank-check companies have filed to go public on the New York Stock Exchange or Nasdaq between April 2 and April 30, versus a weekly average of 24 throughout the rest of 2021, according to S&P Global Market Intelligence data.
How long the slowdown will last, and what the market will look like when it does reopen, are now the most pressing questions.
Auditors, accountants and lawyers are still debating what to do about SPACs that have already issued warrants, as well as how new SPACs coming to market can issue warrants that are treated as equity, according to Ropes & Gray Partner Paul Tropp, who co-chairs the firm's capital markets practice. And until those questions are cleared up, the SPAC pipeline may stay clogged.
"There's a lot of confusion in the marketplace in light of the SEC guidance," Tropp said. "Coming to a consensus and to a clear path is going to take time."
Bankers do see the SPAC market picking back up over the coming months, especially with hundreds of SPACs still on the hunt for a deal. Analysts from The Goldman Sachs Group Inc. recently estimated that SPACs could created upwards of $900 billion in M&A value over the coming two years. And the investment bank's chairman and CEO, David Solomon, told Wall Street analysts on the company's earnings call that the structure is "here to stay," but that there will likely be more changes around the edges related to sponsor economics, investor protections and disclosures.
Cowen Inc., another active investment bank in the SPAC market, is similarly expecting fewer SPAC listings in the near term, but still anticipates the M&A market to be active.
"When I look at what we have in front of us to execute between now and year-end, in terms of the de-SPAC process, PIPE raising and execution, it's incredibly robust," Cowen Chairman and CEO Jeffrey Solomon said, according to a transcript of the company's earnings conference call April 29.