US 'blank cheque firms' face accounting crackdown

NEW YORK • United States regulators are throwing another wrench into Wall Street's Spac (special purpose acquisition company) machine by cracking down on how accounting rules apply to a key element of such blank cheque firms.

The Securities and Exchange Commission (SEC) is setting forth new guidance that warrants, which are issued to early investors in the deals, might not be considered equity instruments and may instead be liabilities for accounting purposes.

The move threatens to disrupt filings for Spacs until the issue is resolved, according to sources who asked not to be named because the conversations were private.

"The SEC indicated that they will not declare any registration statements effective unless the warrant issue is addressed," according to a client note sent by accounting firm Marcum that was reviewed by Bloomberg.

The accounting considerations mark the latest effort by the SEC to clamp down on the white-hot Spac market. For months, it has been raising red flags that investors are not being fully informed of potential risks associated with blank cheque companies, which list on public stock exchanges to raise money for the purpose of buying other entities.

In a Spac, early investors buy units, which typically include a share of common stock and a fraction of a warrant to purchase more stock at a later date.

They are considered a sweetener for backers and have thus far been considered equity instruments for accounting purposes.

Sponsor teams, or the management of a Spac, are also typically given warrants as part of their reward to find a deal, on top of founder shares.

The SEC issued its guidance late on Monday after a firm asked the agency how certain accounting rules applied to Spacs, according to another source.

It is unclear how many companies will be impacted by the move, and not all warrants will be affected.

Still, regulators consider it likely to be a widespread issue. Firms will be expected to review their statements and correct any material errors, said the source.

The shift would spell a massive nuisance for accountants and lawyers, who are hired to ensure blank cheque companies are in compliance with the agency.

Spacs that are already public and that have struck mergers with targets may have to restate their financial results, the sources said.

More than 550 Spacs have filed to go public on US exchanges in the year to date, seeking to raise a combined US$162 billion (S$217 billion), according to data compiled by Bloomberg. That exceeds the total for all of last year, during which Spacs raised more than all previous years combined.

The deluge has overwhelmed those responsible for reviewing filings at the SEC, triggered a surge in liability insurance rates for blank cheque companies and fuelled market anxieties that the bubble is about to burst.

BLOOMBERG