Wall Street struggling with new SPAC stock contracts after SEC crackdown

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Wall Street accountants and lawyers are trying to find new equity deals to lure investors into the blank check company market after the US regulator cracked down on the use of warrants, six executives told Reuters. ‘industry.

They are discussing drop warrants issued by Special Purpose Acquisition Companies, or SPACs, in favor of rights deals, or the radical restructuring of warrants after the Securities and Exchange Commission (SEC) said many SPAC warrants should be treated as liabilities.

The surprise SEC announcement in April halted an already sluggish PSPC market as accountants and lawyers scrambled to find a solution with SEC staff, people said.

PSPCs are shell listed companies that raise funds to acquire and introduce a private company on the stock exchange, allowing targets to bypass the stricter regulatory controls of an initial public offering.

“There are discussions going on between audit firms, companies testing the views of the SEC,” said David Brown, lawyer at Alston & Bird LLP. “Certainly, companies that haven’t gone public yet are looking for potential workarounds. “

SAVS generally offer ordinary shares with warrants attached at the time of listing. While some star sponsors of PSPC have been able to forgo mandates, most see contracts as a key way to attract early investors who may have to lock in their money for years.

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The contracts give PSPC sponsors and outside investors the right to buy common shares in the new merger-created entity at a pre-agreed price, an attractive offer if the share price rises. They also offer personalized terms, including anti-dilution protections and other provisions that mitigate potential losses.

But the SEC challenged them in part because they often offer certain investors, such as sponsors of PSPC, a better deal than public investors, the sources said. Retail investors in particular may struggle to understand the complex terms of warrants or not know when they can redeem them, the SEC said.

Changing the classification means higher quarterly costs for PSPCs as they pursue targets and provides greater visibility into fluctuations in their potential debt, sources said.

And warrants typically have complex pricing terms and provisions allowing holders to make potential cash payments that are also more characteristic of debt than equity, the SEC said.

“The SEC was perhaps worried that sponsors would get richer than other investors,” said Jeffrey Weiner, managing director of auditor Marcum LLP, which handles more than 40% of PSPC audit work, according to the data. by SPACInsider.

A record $ 100 billion was raised by U.S. PSPCs from early 2021 through March, according to Dealogic data, when the market began to weaken amid increasing regulatory scrutiny. There were 298 IPOs of PSPC in the United States in the first three months of the year, but only 32 in April and May, according to data from Dealogic.

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The SEC’s new stance means that SPACs, instead of doing a one-off valuation of stocks, should account for warrants quarterly as debt, a costly process that will potentially make them less attractive to targets and investors. other investors.

The restructuring of contracts after the IPO is complex and many SPACs in this phase have few options other than reclassifying warrants as liabilities on their books, which many have, according to accountants and public documents.

“Performing this assessment each quarter can be time consuming and costly,” said Angela Veal, managing director of the accounting firm EisnerAmper LLP.

ALTERNATIVE CONTRACTS

Sponsors looking to launch a SPAC IPO may have more options, Wall Street accountants and lawyers said. They are trying to find an alternative instrument that would offer similar economic benefits to warrants and comply with equity accounting treatment.

Rights agreements, equity contracts that also give investors the right to buy shares at a set price and date, are one considered alternative, Weiner and others said.

Such contracts are commonly used by European companies to raise capital by offering shareholders the right to buy more shares, but it may not be possible to customize rights agreements as tightly as mandates to mitigate investor risk, the people said.

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Some pre-IPO PSPC sponsors are removing or changing loss mitigation provisions and complex pricing terms in an attempt to meet equity accounting rules, a move that could make it harder to attract early-stage investors, according to reporters. documents and industry executives interviewed by Reuters.

Discussions between the industry and the SEC are ongoing, people said, and it was not clear whether the rights agreements or the simpler terms of the mandates would fully address the SEC’s concerns.

An SEC spokesperson said agency staff “continue to make themselves available to consult on … accounting matters in order to facilitate capital formation and protect investors.”

In the meantime, some hot sector-focused PSPCs are canceling mandates altogether. Last week, for example, venture capitalist Chamath Palihapitiya launched four warrantless biotech SPACs, in what is likely to be a major test of investor appetite.

Industry executives hope that finding new terms or something to replace warrants will give the declining PSPC market a boost.

“It’s going to pick up, but not at the same rate as before,” Marcum’s Weiner said.

(Reporting by Chris Prentice Additional reporting by Anirban Sen Editing by Michelle Price and Steve Orlofsky)

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