Note that the Form S-4 will not be declared effective by the SEC until the warrant accounting issue is resolved. Accordingly, if there is a change in accounting treatment, the SPAC financial statements will need to be corrected or restated, depending on materiality assessment, and the disclosure and the pro forma information in the Form S-4 and other disclosures (such as MD&A and risk factors) will need to be updated accordingly. The same considerations would also apply where an S-4 is not required to be filed and the SPAC has filed a preliminary proxy statement with respect to the business combination. Regardless of SPAC lifecycle stage or materiality, the registrant should consider evaluating its internal control over financial reporting and disclosure controls and procedures to determine whether the controls are adequate in light of the error.
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Given the proliferation of SPACs as an alternative to the IPO process, scrutiny of this vehicle is likely to continue to increase. Due to the large volume of SPACs and the ubiquity of their capital structure, this issue is expected to impact hundreds of organizations in all phases of the SPAC lifecycle.
Tender Offer Provisions
- OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.
- If so, the next steps may vary depending on where the SPAC is in its lifecycle and the materiality of the accounting error.
- Our valuation experts provide valuation services for financial reporting, tax, investment and risk management purposes.
- The Staff is of the view that certain common SPAC warrant terms could cause SPAC warrants to be classified as a liability rather than equity under U.S.
- As pointed out in the statement, the evaluation of the accounting for contracts such as warrants issued by a SPAC requires careful consideration of the specific facts and circumstances for each entity and each contract.
- ” and “What if the SPAC or post-de-SPAC combined company cannot file the periodic report by the extended deadline?
In the event liability classification is required, the warrants should be measured at fair value, with changes in fair value each period reported in earnings. On April 12, 2021, the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”), which highlighted a number of important financial reporting considerations for SPACs. Most notably, the statement describes two fact patterns that are common in warrants issued in connection with a SPAC’s formation and initial registered offering.
Events & Publications
In this client alert, we summarize the considerations raised by the Staff Statement for SPACs at various stages in their lifecycles. If the misstatement is determined to be material, the financial statements will be required to be restated (“Big R restatement”). The organization would be required to issue amended 10‑K or 10‑Qs, as applicable, to correct the misstatement. The organization may also be required to file a Form 8-K under Item 4.02 stating that previously issued financial statements should not be relied upon.
steps to assess and address the issue
Note, that if a SPAC determines the error is not material, it may provide the Staff with a written representation to that effect, with such written representation filed as correspondence on EDGAR. In addition, as registrants and their advisors evaluate the effects of any possible changes to their public disclosure, they are reminded of their obligations under Regulation FD not to selectively disclose material nonpublic information. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP.
Lastly, while the emphasis of the statement was on warrant issues, financial reporting complexities extend to other areas of SPAC financial statements, including earn-out or compensation arrangements and other complex financial instruments. These and other matters are discussed in the March 31, 2021 OCA release, Financial Reporting and Auditing Considerations of Companies Merging with SPACs. In this fact pattern, the warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. On April 12, 2021, the SEC issued a new Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs).
In most cases the Public and Private warrants survive the de-SPAC transaction and become part of the capital structure of the combined entity. Further, as the combined company will need to file the Super 8-K within four business days of closing, the parties must ensure that the restated financial statements and related disclosures will be prepared in time to meet the filing deadline (or postpone the closing until such time as the disclosure will be ready for inclusion in the Super 8-K). Virtually all SPACs have both public warrants (issued as part of the units sold in the IPO) and private warrants issued to the SPAC sponsors. The terms of the public warrants and the private warrants are substantially similar, except that the private warrants typically do not have redemption provisions as long as the warrants are held by the SPAC sponsor or by a permitted transferee and provide for both cash and cashless exercise. In contrast, public warrants typically can only be exercised for cash, except in the case of specified redemption scenarios, and are typically subject to redemption by the SPAC. 1 This treatment results because the variable (the holders’ characteristics) are not inputs to the fair value of a fixed-for-fixed forward or option on equity shares under U.S.
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If the business combination has already closed, the post-de-SPAC combined company must undertake the same analysis as that of an already public SPAC, including as described under “Why is this creating such an issue? ” and “What if the SPAC or post-de-SPAC combined company cannot file the periodic report by the extended deadline? ” From a materiality perspective, it is possible that the post-de-SPAC combined company could conclude the error is immaterial, given that the post-de-SPAC combined company is typically larger than the SPAC and as such, the threshold for materiality may be higher. However, this may vary for historical versus future periods and thus a post-de-SPAC combined company may nonetheless need to restate financial statements for periods prior to the de-SPAC.
- A conclusion that the error is material within the meaning of SAB No. 99 will necessitate the restatement of previously-issued financial statements.
- The terms of the public warrants and the private warrants are substantially similar, except that the private warrants typically do not have redemption provisions as long as the warrants are held by the SPAC sponsor or by a permitted transferee and provide for both cash and cashless exercise.
- These fact patterns led the staff of the Office of the Chief Accountant (OCA) to conclude that the warrants did not meet the requirements for equity classification and as such should be classified as a liability.
- Throughout the development of this issue, CFGI has remained informed and prepared through our close collaboration with auditors, clients and other stakeholders.
- We are uniquely positioned to assist with technical accounting assessments, SAB 99 memos, valuation analysis and all reporting requirements.
- In addition to analyzing the materiality of the accounting error for the purposes of determining whether to restate previously-issued financials, the registrant will need to evaluate the materiality of the financial statement changes to the investment decision to vote with respect to the transaction.
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This has already resulted in numerous SPACs restating their financial statements in their annual reports (and any quarterly reports filed since their last annual report). If the change is deemed to be immaterial and the SPAC has not yet filed its Form 10-K, the SPAC should reflect the appropriate accounting treatment in its financial statements to be filed with its Form 10-K. If the SPAC has filed its Form 10-K, the SPAC may reflect the new accounting treatment in its next Form 10-Q and update its prior year audited financial statements and include footnote disclosure regarding the change in accounting treatment and the impact thereof on historical and future reporting periods. We understand that the SEC will not declare registration statements effective or clear merger proxy statements until the registrant has made a determination regarding materiality and restatement, and appropriate filings have been made.
Our lawyers provide innovative and practical counsel on a wide variety of capital raising and securities law compliance matters. With each, we build long-term relationships, generating efficiencies and helping staff statement on accounting and reporting considerations for warrants them realize their business goals. Contact information is provided in the statement for companies that wish to direct questions to the SEC.