Thu, Apr 15, 2021

SPAC Warrants Under SEC Scrutiny

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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). U.S. Generally Accepted Accounting Principles (GAAP) include guidance that entities must consider in determining whether warrants that settle in an entity’s own stock should be classified as equity of the entity or as an asset or liability. While SPACs have typically classified warrants on their balance sheets as equity, under certain circumstances, the SEC has highlighted that GAAP would require certain warrants to be classified as a liability and measured at fair value every quarter, with changes in fair value reported in earnings. SPACs that have misclassified their warrants as equity may be required to restate their financial results if the impact is deemed material.

SPACs should take the following actions immediately in connection with the new SEC Staff Statement.

  • Talk to your auditor to determine if the current accounting treatment of warrants issued in connection with your SPACs formation and initial registered offering is appropriate in light of the new SEC Staff Statement.
  • If you determine with your auditor that the warrants were misclassified as equity, obtain an independent valuation for the IPO date and subsequent quarter ends; then, discuss with your auditor appropriate changes to previously issued financial statements.
  • On a prospective basis every quarter, estimate the fair value of the warrant liability.

Kroll, is working with our SPAC clients and sponsors on determining the fair value of the warrant liability in connection with reclassification as a liability on the balance sheet at the IPO date and at subsequent quarterly reporting dates. As the leading independent valuation services firm in the world, given our scale we are uniquely positioned to provide the requisite fair value determination to support a SPAC’s financial reporting obligations in a timely manner. We can also assist you in responding to valuation questions from your auditor, other stakeholders and regulators. Kroll offers a full suite of services to SPACs, including valuations for financial reporting and tax purposes (i.e., business combinations, warrant valuations, etc.), valuations of interests in SPACs (including founders’ interests, PIPES and restricted shares), fairness opinions, buy- and sell-side due diligence, compliance risk and governance, disputes consulting, among others.

Given the proliferation of SPACs as an alternative to the IPO process, scrutiny of this vehicle is likely to continue to increase. Contact one of our experts today to discuss your valuation and related advisory needs.

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