Mergers & Acquisitions

SEC Could Reclassify SPAC Warrants And Hold Up New Filings: Report

Warrants could soon be considered liabilities instead of equity for accounting purposes.
Vincent RyanApril 13, 2021

The Securities and Exchanges Commission has been vocal about making changes to the SPAC industry. The latest change from the SEC could center around how SPAC warrants are classified.

What Happened: Warrants, which are typically issued for SPACs when units begin trading, could be reclassified by the SEC according to Bloomberg. SPAC units typically represent a common share of the SPAC and a portion of a warrant for the SPAC.

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SPAC sponsor teams are typically given warrants as a reward to find a deal on top of their founder’s shares.

“The evaluation of the accounting for contracts in an entity’s own equity, such as warrants issued by a SPAC, requires careful consideration of the specific facts and circumstances for each entity and each contract,” SEC officials said.

Warrants could soon be considered liabilities instead of equity for accounting purposes. The change would create a massive nuisance for accounts and lawyers involved in SPAC deals, according to Bloomberg.

Why It’s Important: Investors would likely not be affected by the change in classification by the SEC. The big impact would be the delay it could cause in new SPAC units to begin trading.

More than 550 SPACs have filed in 2021 representing over $162 billion in potential capital raised. That total is more than all of 2020.

“The SEC indicated that they will not declare any registration statements effective unless the warrant issue is addressed,” according to a note from the accounting firm Marcum, reports Bloomberg.

SPAC warrants are a popular trading option for investors that are similar to trading options. The investment vehicles are considered riskier but can also provide better returns than investing in common shares of a SPAC.

Changes by the SEC could prompt some companies to offer SPACs without warrants to get around the new proposal.

This story originally appeared on Benzinga. © 2021

Benzinga does not provide investment advice. All rights reserved.