Wall Street is working on new SPAC stock deal after regulatory crackdown

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File Photo: The Securities and Exchange Commission seal will be seen at its headquarters in Washington, DC, USA on May 12, 2021. Photo taken on May 12, 2021. REUTERS / Andrew Kelly / File Photo

June 8, 2021

By Chris Prentice

Washington (Reuters) – Wall Street accountants and lawyers are trying to find a new stock deal to get investors back on the blank check market after U.S. regulators crack down on warrant use, six people said. The industry manager told Reuters.

You are discussing waiving warrants issued by Special Purpose Acquisition Companies (SPACs) and should agree to a rights agreement or the Securities and Exchange Commission (SEC) should treat many SPAC warrants as debt. With that said, we’re reorganizing the warrants dramatically.

The SEC’s surprise announcement in April put an end to the already sluggish SPAC market as accountants and lawyers rushed to find a solution with SEC staff … they say.

SPAC is a publicly traded shell company that raises funds for the acquisition and publication of private companies and enables target individuals to avoid stricter regulatory audits on initial public offerings.

“There is an ongoing debate between the accounting firm and the companies that pressurize and validate the SEC’s views,” said David Brown, attorney at Alston & Bird LLP. “Sure, companies that have not yet gone public are looking for possible workarounds.”

SPACs typically offer common stock with a warrant attached at the time of listing. Some well-known SPAC sponsors have been able to withhold warrants, but for the most part, contracts are an important means of enticing early investors who have to lock up cash for years. I think there is.

The agreement gives SPAC sponsors and outside investors the right to purchase the common stock of the new company created by the merger at a pre-agreed price, which is an attractive offer when share prices rise. Become. It also offers bespoke terms such as anti-dilution protection and other precautions to reduce potential losses.

However, the SEC interviewed some investors, such as SPAC sponsors, as they often offer better deals than regular investors, sources said. Retail investors in particular may have difficulty understanding the complex terms of warrants or not knowing when to redeem, the SEC said.

The change in classification means the SPAC is aiming for goals and getting better visibility of potential debt volatility while increasing the SPAC’s quarterly cost, sources said.

According to the SEC, warrants typically have complex pricing terms and regulations that give holders the option of cash payments, which are also more characteristic of liabilities than stocks, the SEC said.

According to SPACInsider data, Jeffrey Weiner, CEO of Marcum LLP, a chartered accountant responsible for more than 40% of SPAC’s audit work, said, “The SEC is much more sponsored than other investors. Maybe that’s what worried you.

From early 2021 to March 2021, the US SPAC raised a record $ 100 billion, according to Dealogic. According to Dealogic, there were 298 SPAC IPOs in the US in the first three months of the year, compared with just 32 in April and May.

The SEC’s new stance means that instead of a one-time share valuation, SPAC will have to post warrants as a quarterly liability.

Post-IPO contract restructuring is complex according to accountants and official documents, and many SPACs have no choice but to reclassify warrants as liabilities at this stage.

Angela Veal, Managing Director of the auditing company EisnerAmper LLP, said:

Alternative contract

Wall Street accountants and attorneys said there may be more opportunities for sponsors considering a SPAC IPO. They try to find alternatives that offer the same economic benefits as warrants and that are consistent with the accounting treatment of stocks.

Weiner and colleagues said they are also considering a rights subscription agreement that gives investors the right to buy shares at a set price and date, a share contract.

Such contracts are often used by European companies to raise capital by giving shareholders the right to buy shares, but option rights contracts to reduce investor risk. They said it might not be that strictly customized.

According to application filings and industry executives interviewed, prior to going public, some SPAC sponsors removed or fine-tuned loss-limiting clauses and complex pricing terms to meet inventory accounting requirements. .. Reuters.

Discussions are ongoing between the industry and the SEC, he said, and it is unclear whether rights agreements and simpler warranty terms would completely address the SEC’s concerns.

A SEC spokesman said government officials “will continue to be able to discuss accounting issues to help capital build and protect investors.”

Meanwhile, some SPACs focused on the hot sector are running full warrants. For example, venture investor Chamath Palihapitiya last week launched four biotech SPACs that, without a warrant, could be an important test of an investor’s appetite.

Industry executives hope the search for new terms or something to replace warrants will shock the collapsing SPAC market.

“It’s going to go up again, but not at the same pace as before,” said Weiner of Markham.

(Report by Chris Prentice, additional report by Anirban Sen, edited by Michelle Price and Steve Orlofsky)

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