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Exclusive-U.S. SEC cracks down a second time on SPAC equity accounting treatment


© Reuters. FILE PHOTO : This seal, which is the U.S. Securities and Exchange Commission, can be seen at its headquarters in Washington D.C. U.S.A, on May 12, 2021. REUTERS/Andrew Kelly/File Photo

By Anirban Sen, Chris Prentice and Krystal Hu

WASHINGTON/NEW YORK (Reuters) – Expanding its crackdown on the SPAC sector, the U.S. Securities and Exchange Commission has told top auditors of blank-check acquisition companies to account more strictly for public shares in these shells, according to multiple industry accountants and lawyers familiar with the change.

According to people familiar with the matter, top SEC auditors have told SPACs’ Special Purpose Acquisition Companies that any “redeemable” share issued by such shells should be treated as temporary equity. It is an abrupt departure from industry tradition of treating these shares as permanent equity.

Most SPACs will fall below the Capital Market tier’s minimum capital requirements. The changes will push SPACs who want to list on Nasdaq up to its Global Market level, which doesn’t have any equity requirements, they said.

This is the second year in a row that the SEC tightens SPAC accounting guidelines. It’s also the latest move by the agency to crack down on SPAC deal market which has been a lucrative business for Wall Street the last 18 months.

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The long-term consequences of SPACs being listed as “in the pipeline” were unknown, but some auditors and industry lawyers said the move was a worrying indicator that the SEC was trying to reform long-established practices in the SPAC marketplace.

Jeffrey Weiner (CEO of Marcum LLP), who handles 40% of SPAC audit work according to SPACInsider, stated that it was a shift in accounting treatment as well as a change of the SEC’s view of the matter.

By listing shell companies, SPACs can be used to publicize private companies without going through the lengthy and more tedious initial public offering process. SPACs have closed more than 100 billion dollars in deals this year in an age of unlimited money.

The SEC warned that investors are at risk due to the SPAC boom. SPAC deals require less regulatory oversight than IPOs. It has increased scrutiny of the sector, from SPAC marketing and fees to disclosures, conflicts of interest and accounting treatment.

In April, the SEC issued guidance suggesting hundreds of SPACs should account for equity warrants as debt, putting a damper on the market and driving efforts to test new contracts.

SEC staff recently questioned whether redemption shares of the SPAC shell listed as permanent equity should be. This is because shareholders can sell them back to the SPAC at any time if it does not agree with the proposed deal.

The sources claimed that the SEC told auditors recently in private talks that the redeemable shares should be treated entirely as “temporary stock”.

This is consistent with the SEC’s official guidelines on redeemable shares as well as Generally Accepted accounting principles.

SPAC auditors used to treat redeemable shares in permanent equity because they were required by some charters of SPAC, which requires that the minimum amount of permanent equity be $5 million. The SEC did not object.

Marcum’s Weiner said that “the current accounting treatment was in place” and has been accepted over the years. According to Weiner, some Marcum partners spoke with SEC personnel about this issue.

KPMG is another major SPAC auditor. The spokespersons for these companies refused to comment.

According to sources, it is not clear whether the SEC will issue guidance public on this issue. The regulator refused to comment.


A Nasdaq spokesperson confirmed that the accounting change had forced SPACs to switch their planned listings from its Capital Market to its Global Market.

The SEC’s March guidance was not as impactful for SPACs as the April one, but it is still causing problems for Nasdaq. SPACs are typically listed on the Capital Market. This is a market that allows companies to raise capital and has minimal capital requirements.

SPACs must have at least 400 shareholders in order to be listed on the Global Market. However, there is no minimum capital requirement.

A spokesperson for Nasdaq stated that they are working on a rule amendment to allow companies with 300 shareholders to list on their Global Market. The date of when this would become effective was not known.

According to Nasdaq data currently, there are nine SPACs trading on the Global Market. These SPACs have been in existence since June 2021, the date when the SEC raised questions about the redemption of shares.