Why SPACs Have Suddenly Dropped In Value And Frequency

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The last time we wrote about SPACs, we were interested in where SPACs could go. They seemed like efficient ways for gaming companies to go public a little faster than an IPO. However, SPACs have slowed down recently. The SEC is thinking about reclassifying key parts of the SPAC’s value that would disrupt current SPACs. That’s made some analysts wonder whether SPACs are still reliable ways to go public. However, this will likely be a short-term interruption. Even though the values and numbers of SPACs have dropped recently, they will likely recover once the SEC issue is resolved.

What Did The SEC Do?

The SEC hasn’t taken any actions, yet. Instead, they’ve released a statement suggesting that they might take action. The dramatic action that’s stressing SPAC investors out is deciding whether to account for SPAC warrants as liabilities instead of equity.

The biggest impact that would have on SPACs is refiling and redoing their past financial statements. That will be an expensive and inconvenient process. The threat of a big accounting change like that is making many SPACs wait to file. They don’t want to make an expensive change right after they go public. They’d rather do it right the first time and be done. That way, they can focus on competing instead of waiting to see whether they have to redo all their financial forms.

What Are SPAC Warrants?

Warrants are documents that let investors buy stock. One SPAC warrant may entitle the person holding it to buy part or all a share of stock. So, if an investor buys stock and warrants, that investor can not only cash in on stock gains. But they can compound those gains by purchasing more stock and increase their returns. It could be risky if the stock value remains flat. But if the stock value increases, then warrants are valuable.

SPACs issue warrants to sweeten the deal for investors. SPACs raise money until they have enough to buy a private company and bring it public. Done successfully, it can be a profitable venture. However, there’s a lot of dead time for investors where they’re not making any money. Warrants incentivize investors to put the money up to buy a company so they can compound their gains in increased stock value.

Why The SEC Thinks Warrants Should Be Liabilities Instead Of Equity

There’s a set of accounting rules called the Generally Accepted Accounting Principles (GAAP), which is still hilarious three years after graduating business school. Under GAAP, there are two reasons that warrants could be classified as liabilities.

The first is called indexation. If the warrants’ values were fixed to the stock price, then they’d count as equity. However, the person holding the warrant changes the value of the warrant. Some people get different values out of the warrant than others. The SPAC investors, the company founders, and other investors who bought warrants later may get different values from their warrants based on who they are. That ability to change the warrant’s value makes the SEC think some warrants should be classified as liabilities.

The second has to do with tender offer provisions. The tender offer itself is not important. However, the terms under it are. The jdsupra article that breaks the warrant issue’s legal implications down explains it best:

“Under U.S. GAAP, if an event outside a company’s control could require a net cash settlement, then the instrument should be classified as a liability and not as equity.”

So, if something happens that the company can’t control, and the company has to pay someone for it, that’s a liability. There’s a common warrant term that matches this description, which jdsupra also states the most clearly:

“SPAC public warrants typically provide that if a tender or exchange offer is made to and accepted by holders of more than 50 percent of the outstanding shares of a class of common stock, then all [warrant-holders] would be entitled to receive cash for their warrants.”

Since SPACs don’t control which investors accept such an offer, this could make some warrants liabilities instead of equity.

What Happens After The SEC Makes A Real Decision?

If the SEC decides to make SPACs refile certain documents, then the entire SPAC industry will have an expensive, time-consuming process ahead of them. The SEC would regulate SPACs and SPACs would have to adjust in response.

That reorganizing would likely result in a further drop in market value. However, that drop will be temporary. Wynn Resorts has just gone public through a SPAC, which may be bad timing. But even it could come out with valuations ahead of DraftKings and FanDuel once the SEC issue is resolved. Either the SPACs will conform to new SEC guidelines or the SEC will decide that SPAC warrants don’t have to change. But once that’s dealt with, then SPACs will go back to accelerating the process of going public for companies in young industries.

About the Author
Christopher Gerlacher

Christopher Gerlacher

Writer and Contributor
Christopher Gerlacher is a Senior Writer and contributor for Gaming Today. He is a versatile and experienced writer with an impressive portfolio who has range from political and legislative pieces to sports and sports betting. He's a devout Broncos fan, for better or for worse, living in the foothills of Arvada, Colorado.

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