Special Purpose Acquisition Companies (SPACs) have been around for decades, but unprecedented growth in SPAC popularity in 2020 and 2021 has brought lots of attention from investors and regulators, along with those of us in accounting and financial reporting. We first reported on SPACs in a two-part series discussing their lifecycle as well as accounting and financial reporting considerations in March 2021. Those blogs can be found here and here. So, what are the latest trends from a market, accounting, and financial reporting perspective? This blog will highlight some of those latest trends.
While 2020 and 2021 saw unprecedented growth in the SPAC market, 2022 has so far shown a considerable slowdown. The following graph shows the market through the end of 2021. Compare those results to the first four months of 2022 when only $10.4 billion was raised in 59 SPAC IPOs.
So, what happened? It’s hard to pinpoint an exact cause; instead it is likely that a combination of factors has caused the recent sudden slowdown. The previous popularity in SPACs has created a saturated SPAC market and a decline in quality of target companies and SPAC sponsors. That, combined with overall declining macroeconomic conditions certainly has contributed to the slowdown. These conditions have led to underperforming companies post-acquisition (“deSPACs”), in addition to limited capital to complete the acquisition. That limited capital is due to high shareholder redemptions (remember, shareholders can redeem their shares if they don’t like the proposed merger) and more limited “PIPE” capital (i.e., the capital that comes from investment companies involved in the transaction). Finally, there has been increased scrutiny from the SEC along with new regulations that may also have contributed to the cooling SPAC market.
Although there has been a slowdown in the SPAC market, these transactions are still occurring, therefore, it is important to understand the accounting issues that may arise. One of the key accounting considerations in a SPAC transaction is how to classify and account for the various instruments issued such as founder shares, investor shares, and warrants. Each of these instruments has unique features, particularly when issued as part of a SPAC transaction, and must be evaluated to determine if they should be classified as a liability, equity, temporary equity, or maybe even as a share-based payment arrangement! This is one of the most challenging areas of U.S. GAAP and requires the consideration of several different pieces of accounting literature such as ASC 480, ASC 815-40, and ASC 718. The redeemable feature that is often included in the shares issued to investors requires specific consideration and warrants issued also require scrutiny. Warrants were the cause of a significant number of SPAC “Big R” restatements in 2021.
Another important accounting consideration is how to account for the “acquisition” of the target company. While it may qualify as a “traditional” business combination where the SPAC is the acquirer and the target is the acquiree, often this is not the case. Due to the unique nature of the entities involved, sometimes a reverse acquisition has occurred where the target company is actually the acquirer of the SPAC for accounting purposes. Reverse acquisitions have unique accounting and financial reporting requirements. To make it more complicated, sometimes the reverse “acquisition” doesn’t qualify as a business combination and is actually a reverse “recapitalization” for which there is no specific guidance in U.S. GAAP!
There are numerous other considerations for SPACs such as accounting for earn-out arrangements, accounting for PIPE commitments, and accounting for contingent consideration issued as part of the target acquisition.
The following timeline summarizes the SEC filing and reporting requirements during the SPAC lifecycle. Each of these requirements has specific considerations for SPACs.
In addition to the normal SEC reporting requirements summarized above, the SEC has discussed, and issued guidance on, issues specific to SPACs:
- Issued Disclosure Guidance, Topic No. 11 in December 2020, which specifies disclosure considerations for SPACs
- Issued an investor bulletin (December 2020) to educate investors about investing in SPACs and an investor alert (March 2021) about celebrity involvement in SPACs
- The Division of Corporation Finance and the Office of the Chief Accountant issued separate public statements on the risks related to the increase in SPAC transactions in March 2021
- Issued Proposed Rule Release No. 33-11048 in March 2022, proposing certain amendments to SEC rules, enhanced disclosures, and additional investor protections for SPAC transactions. See our blog post on this proposal here.
As you can see, there has been increased scrutiny on these transactions by the SEC, leading to new rules and regulations.
This post provided a high-level overview of the latest SPAC trends from a market, accounting, and financial reporting perspective. Want to learn more about these latest SPAC trends? Join us on Thursday, May 12 at 10:30 EST for a 2-hour CPE-eligible webinar that will cover SPAC structure and lifecycle, key accounting issues associated with SPAC transactions, and financial reporting requirements, including SEC guidance. Register here!
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