SEC Statement on Accounting for Warrants in SPAC IPOs is Causing Some Hands to Wring

On April 12, 2021, the Securities and Exchange Commission (SEC) released a new interpretation, without notice or a comment period, which calls into question whether warrants issued by special purpose acquisition companies (SPACs) could continue to be considered equity instrument.  The SEC’s new interpretation reveals a position that is contrary to widespread practice of classifying warrants as equity securities; the SEC guidance provides instead that most warrants issued in connection with a SPAC transaction should be
accounted for as liabilities.

Nearly every SPAC offering involves an offering of “units” that comprise (i) common stock and (ii) warrants to purchase common stock. The guidance suggests that many SPACs may potentially have to refile their financial statements to account for the warrants as a liability.  Such warrants would be reported at their estimated fair values at each reporting period, with corresponding adjustments reflected in the SPAC’s “Statements of Operations” section of their financial statements.

We anticipate that investors are not likely to be affected by the change in equity classification by the SEC.  The more compelling outcome from the SEC’s guidance on the accounting for warrants is the potential delay to begin trading of new SPAC units, as time is needed to determine whether a restatement is required, which affects some of the more than 550 SPACs that have filed S-1s in 2021.