The evaluation of the severity of any control deficiency should not be limited to the actual misstatement that occurred or whether that misstatement was material, but instead should consider the magnitude of the potential misstatement resulting from the deficiency or deficiencies, amongst other considerations. OCA is available for consultation on accounting and financial reporting issues, including relating to an entity’s specific fact pattern on issues similar to those described above or on other instruments and accounting issues. In this fact pattern, the warrants included provisions that provided for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant.
Episode #21: SPAC Trends, Advantages and Obstacles (Davina Kaile)
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- Generally, a SPAC will be able to correct material errors related to accounting issues by amending its most recent Form 10-K and any subsequently filed Form 10-Qs.
- Depending on the timing of the meeting, the SPAC would need to consider whether or not it needs to change the timing of its stockholder meeting.
- However, if management’s materiality analysis concludes that only a “Little r restatement” should be made, a newly public SPAC that already filed a Form 10-K will not need to amend its previously filed Form 10-K and will be able to correct the accounting treatment of its warrants in its upcoming Form 10-Q filing.
- What if the SPAC has already entered into a BCA and has filed a Form S-4 registration statement that has not been declared effective?
Another problematic SPAC warrant provision identified in the Statement relates to tender offers. Depending on the timing of the meeting, the SPAC would need to consider whether or not it needs to change the timing of its stockholder meeting. Assuming a restatement is determined to be necessary, the SPAC would proceed as discussed above under “Newly Public SPACs.” The amended periodic filings should include an explanatory note following the cover page to briefly describe the restatement. In addition, once the decision to restate is made but before the public announcement, the SPAC should contact its securities exchange. Below, we address in turn the specific considerations that are relevant if a restatement may be required, as well as specific decisions that may be faced by SPACs based on where they are in their life cycle.
In other words, if a qualifying cash tender offer (which could be outside the control of the entity) occurs, in the SEC’s view of the agreement all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. The Statement challenges long-held views about equity treatment for SPAC-issued warrants, suggesting that certain nearly ubiquitous features in SPAC warrants require the warrants to be recorded as “liabilities” on the SPAC’s balance sheet rather than as “equity.” It also highlights financial reporting considerations if a SPAC determines it has misclassified its warrants. The Staff’s observations will have ramifications for almost every SPAC with warrants in its structure — whether in formation/registration, newly public, approaching a business combination, or post-initial business combination (even years ago).
Implementing the Changes in Warrant Agreements for Post-IPO SPACs
- Following a decision to reclassify the warrants, the registrant will need to evaluate the materiality of the accounting error in accordance with Staff Accounting Bulletin (“SAB”) No. 99 – Materiality (codified in SAB Topic 1, Section M – Materiality, available here).
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- The SPAC may also need to consider whether the shareholder meeting should be postponed to provide holders with sufficient time to consider the new information.
- Further, the public warrants, but not the private placement warrants, are subject to redemption when the trading price of the company’s stock following a business combination reaches a specified threshold, typically $18.00.
- The Statement challenges long-held views about equity treatment for SPAC-issued warrants, suggesting that certain nearly ubiquitous features in SPAC warrants require the warrants to be recorded as “liabilities” on the SPAC’s balance sheet rather than as “equity.” It also highlights financial reporting considerations if a SPAC determines it has misclassified its warrants.
- That is, SPAC investors are well aware of the existence and terms of both the private placement warrants and the public warrants, and the accounting treatment is arguably not material to an investment decision to buy into a SPAC (given, among other things, the presence of the trust account and related stockholder redemption features) or a de-SPAC’d company (given, among other things, its much larger size and scope).
Accordingly, if there is a change in accounting treatment, the SPAC financial statements will need to be corrected or restated, depending on materiality assessment, and the disclosure and the pro forma information in the Form S-4 and other disclosures (such as MD&A and risk factors) will need to be updated accordingly. If the table is removed, the post-business combination company will still have the ability to make a tender/exchange offer for the warrants for cash and/or stock (as many post-business combination companies have successfully done in the past), but there is no certainty that a sufficient number of warrantholders will accept the offer. Longtime SPAC market participants will recall that, on at least two prior occasions, SPACs and post-business combination companies faced the need to reclassify their SPAC warrants from equity instruments to contingent liabilities for different reasons.2 In those cases, even for post-business combination companies, the market shrugged it off, because the liabilities and non-cash charges do not affect the company’s revenue, operating expenses, operating income, taxes, cash flows or cash and cash equivalents, or any adjusted EBITDA results the company might report. Securities and Exchange Commission (“SEC”) requiring most warrants issued by special purpose acquisition companies (“SPACs”) to be accounted for as liabilities, SPACs scrambled to determine whether they needed to revise or restate their previously issued financial statements.
Private Placement Warrants
Note that Form S-8 and Rule 144 are predicated on the company being current in its periodic reports (versus timely) while Form S-3 requires companies also be timely in their filing requirements. Rule 144 will also not be available until the company is current in its filings (for de-SPAC combined companies, Rule 144 is not available until 12 months after the Super 8-K filing). Companies that cannot file their periodic reports within the extended time period should issue a press release providing sufficient but not extraneous disclosure regarding the situation (e.g., be cautious if providing estimate of when the restatement will be complete, in case restatement process takes longer than anticipated and thus requiring another press release). What if the SPAC or post-de-SPAC combined company cannot file the periodic report by the extended deadline? Thus the Staff Statement likely impacts most if not all SPACs, but also post-de-SPAC combined companies, as well as transactions throughout the SPAC lifecycle, including formation, SPAC IPO, de-SPAC process, and post-de-SPAC operations. (As noted in the Staff Statement, the statement represents the view of the Division of Corporation Finance and the Office of the Chief Accountant, and is not a rule, regulation, or statement of the SEC.)
Tender Offer Provisions
To learn more about what we offer, fill out the form below To learn more about what we offer, fill out the form below. To learn more about how to make sure your financial reporting remains accurate and defensible, contact your Windham Brannon advisor today, or reach out to Josh Harnevious. Warrants can be valuable tools for capital raising and incentivization, but their accounting treatment requires the utmost consistency as well as expertise. Complex terms such as performance-based vesting, milestone achievements, or contingent pricing mechanisms further complicate the valuation process.
We recently evaluated fact patterns relating to the accounting for warrants issued in connection with a SPAC’s formation and initial registered offering. If an amendment to the warrant agreement is desired, the amendment provision of the applicable warrant agreement will need to be reviewed to determine whether some or all of the changes require approval of the holders of the public warrants and/or the private placement warrants, or if some or all of the changes can be implemented without their approval. SPACs that have completed their IPOs need to consider, in connection with their initial business combinations, whether to amend their warrant agreements to implement the changes to classify their warrants as equity instruments after the consummation of the business combination. This would allow the private placement warrants to be sold publicly, and would also be perceived as aligning the sponsor with the public investors, but would come at a significant economic cost to the sponsor and/or other initial purchasers of the warrants. The first is to keep private placement warrants separate and distinct from public warrants with no possibility of changes to their terms.
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Securities and Exchange Commission (the SEC) issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the Staff Statement). It is not a rule, regulation, or statement of the Securities and Exchange Commission (“SEC” or the “Commission”). Materially different circumstances may warrant different treatment by registrants than set forth above. Registrants and their advisors should also assess whether prior disclosure on the evaluation of internal controls over financial reporting and disclosure controls and procedures needs to be revised in the amended filings. In addition, registrants should consider their obligation to maintain internal controls over financial reporting and disclosure controls and procedures to determine whether those controls are adequate.
These restatements may involve revisions to the financial statements and notes, as well as restated quarterly financial information (Reg S-K Item 302) and revisions to MD&A (Reg S-K Item 303). The primary issue identified in the Statement is whether these warrants should be classified as equity or liability, which depends largely on the specific terms of the warrant and the entity’s specific facts and circumstances. As for materiality itself, some businesses supported the materiality of climate-related disclosures, while others encouraged the SEC to require https://nashvilledrives.com/notes-payable-vs-notes-receivable-key-differences/ company-specific assessments rather than a generic approach. The NYSE no longer requires shareholder approval for issuances to Related Parties in excess of 1% of a company’s common stock if that issuance is made for cash at a price no less than the “Minimum Price” threshold.
Misclassification or misallocation can lead to significant restatement risks, which can put auditors on high alert. Warrants are frequently issued in conjunction with debt financing as an incentive to lenders. When advising companies, our attorney-client relationship is with the company, not with any individual.
This suggests that nearly all private warrants in existing SPAC structures must be reclassified as liabilities for accounting purposes. Virtually all existing SPAC warrants provide that private warrants lose certain special features upon transfer and become fungible with the public warrants. Regardless of SPAC lifecycle stage or materiality, the registrant should consider evaluating its internal control over financial reporting and disclosure controls and procedures to determine whether the controls are adequate in light of the error. Following a de-SPAC transaction, the resulting public company inherits the SPAC warrants and may also be affected by this issue.
When the restated financial statements are available, amended quarterly and annual reports will need to be filed to correct the past filings that relied on the restated financial statements (dating all the way back to the IPO of the SPAC in many cases). Nonetheless, we believe that SPACs and their accountants may choose to engage a third party valuation firm to determine the amount of the liability represented by the warrants. In the context of a misstatement of a financial statement item, while the “total mix” includes the size in numerical or percentage terms of the misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. Thus, a careful reading of each SPAC’s contractual warrant provisions will be required to determine whether in fact liability treatment is applicable rather than equity treatment. The Staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.
The typical SPAC warrant agreement provides for different settlement amounts for the private placement warrants and the public warrants under certain circumstances. Many SPACs issue warrants to investors as part of units sold in their IPOs (“public warrants”) and also issue warrants to their sponsors in a private placement at the time of their IPOs (“private placement warrants” and, collectively, with the public warrants, “SPAC warrants”). At the same time, SPACs have been seeking accounting guidance to determine whether and how to revise the agreements governing their warrants so that their warrants qualify for equity classification. On the other hand, it is likely that SPAC warrant accounting treatment is fundamentally not material to the investment decision of SPAC investors and other than the unfortunate delay that this interpretation causes and the subsequent revisions we expect to see in warrant agreement forms, we do not expect this development to otherwise affect the SPAC market.
The Staff Statement also indicates that if the warrants provide for net cash settlement upon the occurrence of an event outside of the entity’s control, and if not all holders of the underlying equity securities would receive cash staff statement on accounting and reporting considerations for warrants in such circumstances, then the warrant should be classified as a liability. Within four (4) business days of closing a de-SPAC transaction, the combined company is required to file a “Super Form 8-K” which includes current financial statements. Pre-IPO SPACs will have the option of revising the terms of their warrants to ensure that they may be classified as equity or revising their registration statement disclosures to reflect the classification of the warrants as a liability.
Since the release of the Statement, accounting firms involved in SPAC transactions, including the “Big 4” as well as other firms that have dominated the SPAC auditing market, have engaged in discussions with each other and the SEC Staff to address the concerns raised by the Statement, and to otherwise review the standard form of SPAC warrant agreement to determine what revisions are necessary in order for SPAC warrants to be classified as equity instruments. In the Statement, the Staff described two accounting issues, one of which relates to the private placement warrants, and the other of which relates to both the public warrants and private placement warrants. Even if a de-SPAC’d company can avoid a restatement for periods after its initial business combination, the Statement also has implications for each fiscal period reflected in the financial statements. According to the Statement, SPACs that determine that the error is not material to the financial statements and disclosures may provide the Staff with a written representation to that effect in correspondence on Edgar.
As noted above, a post-de-SPAC combined company will also need to file an Item 4.02 disclosure on Form 8-K regarding the restatement (and potentially an Item 3.01 disclosure on Form 8-K if it is unable to timely file any required periodic reports and receives a delisting notice as a result thereof). The same considerations would also apply where an S-4 is not required to be filed and the SPAC has filed a preliminary proxy statement with respect to the business combination. Note that the Form S-4 will not be declared effective by the SEC until the warrant accounting issue is resolved. Note, that if a SPAC determines the error is not material, it may provide the Staff with a written representation to that effect, with such written representation filed as correspondence on EDGAR.
Companies must also suspend use of any registration statement where the use of such form is dependent on the timely filing of periodic reports, until such reports have been timely filed for the required time period (e.g., Form S-3, to the extent a post-de-SPAC combined company is otherwise eligible to use Form S-3, and Form S-8, which cannot be used until the late periodic report is filed). The NYSE or Nasdaq may issue a notice that the company’s shares are subject to delisting, which would trigger another Form 8-K filing under Item https://lsptopiaeeta.co.id/what-does-operating-mean/ 3.01 and the need to work with the stock exchange to resolve the delisting issue. If the instrument’s strike price or the number of shares used to calculate the settlement amount are not fixed, the instrument may still be considered indexed to an entity’s own stock if the only variables that could affect the settlement amount would be inputs to the fair value of a fixed-for-fixed forward or option on equity shares. In addition, as registrants and their advisors evaluate the effects of any possible changes to their public disclosure, they are reminded of their obligations under Regulation FD not to selectively disclose material nonpublic information.
