The Security and Exchange Commission serves investors, registered representatives, and brokerage houses in multiple regulatory and nonregulatory functions. The Division of Corporation Finance recently addressed the accounting of warrants issued by Special Purpose Acquisition Companies, commonly known as SPACs.
Financial Statements
The reporting process and accountability for representatives in the financial industry is stringent and full of checks and balances. Organizations like SPACs are especially susceptible to scrutiny and must remain transparent. When Acting Chair John Coates and SEC Acting Chief Accountant Paul Munter recently cited concerns with the accounting for warrants issued within SPACs, other officials quickly took action.
Special Purpose Investment Vehicles
A main concern for authorities, and possibly a contributing reason for the recent probe, is the shifting paper trail of special purpose acquisition companies. These shell-like formations are often set up with the express intent of being a short term fundraising venture. Sometimes referred to as a blank check company, the investment vehicles may cause confusion for independent investors.
Classifying Warrants
Many companies offer warrants to investors as a way of raising capital. A warrant essentially gives the owner the right to purchase shares of a company stock at a point in the future. Shareholders are not obligated to buy shares if they hold a warrant. In most cases, this offering is mutually beneficial to the company and the shareholder.
SPAC pre-revenue and sponsor teams have been awarded warrants for their capital fundraising efforts. These warrants have been classified as common shares of a company stock, regardless of the time or reason for original issue. In short, warrants have always been considered equity and listed as such in pertinent financial records.
Initial and Periodic Valuation Requirements
The initial review by the SEC regulators determined that many SPACs incorrectly classified and accounted for the warrant in their financial records. Current recommendations are expected to include initial and periodic valuations of SPACs and other investment firms issuing warrants.
Under the proposed new SEC guidelines, warrants could be considered a liability for a firm instead of equity. The reason for the proposed change is to standardize warrant contracts for each entity and owner. SPACs and investment firms will be impacted, potentially causing ongoing trading delays.
Accountants and attorneys for SPACs are looking to qualified valuation firms for accurate appraisals of their warrant issues. Appraisal Economics is the perfect partner for warrant valuations. As an industry leader in valuations of options and derivatives, Appraisal Economics is perfectly poised to assess ongoing warrant valuation needs. We are experienced and without conflict, as we do not engage in securities trading. We have already completed numerous valuations of SPAC warrants.
Continued specific guidance from the SEC will provide additional insight as this reclassification of warrants continues to unfold. Periodic valuations are among the best ways to protect your portfolio and interests. Choose a valuation partner that has the capacity and competency to provide the best information and assessments. You can rest assured our team at Appraisal Economics stand ready to fully explain and adhere to SEC guidance concerning your warrant issues.