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The Wave of SPAC Warrants in 2021

May 11, 2021

Are you interested in SPACs and would like to know about the 101s relating to SPAC warrants? In our first episode of EisnerAmper’s SPAC Podcast series, Nina Kelleher, a Director in EisnerAmper Digital, is joined by Angela Veal, a Managing Director in Technical Accounting Advisory Services practice, for an engaging discussion on the SEC’s statement relating to accounting for warrants, potential accounting and reporting implications, internal control considerations, CFO’s immediate next steps, and more!


Nina Kelleher: Hello, and welcome to EisnerAmper's podcast series on SPACs. I'm your host Nina Kelleher, and today I'll be speaking with Angela Veal. Angela is a managing director in EisnerAmper's technical accounting advisory services practice, with over 20 years of experience in both public and private accounting with a focus on financial services, SPACs, IPOs, mergers and acquisitions.

It seems like every day we hear about SPACs in the news. Most recently, the market has seemed to take a pause, in part in reaction to the SEC's most recent statement regarding the accounting of warrants by SPACs. In this first of the podcast's series on SPACs, I'd like to focus on some common questions SPAC investors and sponsors have been asking EisnerAmper's professionals, and how they should react in order to comply with this most recent development and what we've seen so far. The SEC has been issuing statements directly to SPACs and SPACs' investors for the past couple of months. The one on accounting of SPAC warrants issued in mid-April is now front and center. For individuals who are new to the SPAC world, Angela, can you provide some detail into how SPACs typically issue warrants?
Angela Veal: Thanks, Nina. I appreciate the opportunity to join you for this podcast. SEC's scrutiny in SPAC warrants has definitely stirred up the community a little, and we have been receiving a lot of questions on warrants. When a warrant goes through the IPO process, units are offered to the investors at $10 per share, which includes a share of common stock and a warrant that gives the investor the right to purchase an additional share of common stock, usually at an exercise price of $11.50. The warrants typically cannot be exercised until a business combination event or at least 12 months after the SPAC IPO. These are known as the public warrants.

Through a private placement, the SPAC sponsor may typically purchase the warrants at a price of $1.50 per warrant. These private placement warrants are similar to the public warrants, but certain provisions may depend on who the holder is. For example, the protective provision preventing the SPAC from redeeming these warrants would fall away if the warrants are transferred by the sponsor to third parties.
NK: So given the SEC's statement, how should SPACs reconsider the accounting for these financial instruments?
AV: This is a great and very valid question. Warrants are basically contracts that are settled in the SPAC's own stock, and therefore should be evaluated if they are equity or liabilities under ASC 480 and ASC 815-40. Prior to the SEC's statement, SPACs had historically classified warrants as equity on their balance sheets, based on the premise that they are not settled in cash. And as equity, the warrants are only required to be fair valued at issuance.

After the SEC's statement, many SPACs, including those who have just filed their recent 10-Ks and those in the process of IPOs, are now taking a fresh look at their warrant agreements. Due to the tight deadline, SPACs have been asking us on what they should be looking for when reviewing the warrant agreements. They should pay attention to cash tender and down round adjustment provisions, as well as features that differ based on holder characteristics.

One good example that we have seen is when the agreement states that the features of the private placement warrants will stay the same as long as they are held by the sponsor and permitted transferees. If the warrants are now indeed required to be classified as liabilities instead of equity, the warrants need to get fair valued every reporting period end, which includes every quarter and year end. Any change in fair value of warrants would go through the current period income statement, and companies should also get in touch with their valuation specialists to discuss the implications of the reclassification. If classified as a liability, the proceeds from the issuance of the units should now be allocated first to the warrants based on their fair value, then the remaining proceeds to the common stock. If classified as equity, the allocation of the proceeds is based on the relative fair values of the warrants and common stock.
NK:So considering all this, can you describe some of the components that SPACs should consider in order to determine if a restatement's required in their particular case?
AV:Definitely. Management should first consider if the misstatement is material. Materiality is not just based on a quantitative measure, which many companies have ended up using as their internal guideline in the past. It should be based on both quantitative and qualitative considerations.

For example, we have SPACs who ask us, "If the misstatement is below a certain threshold, for example, below 5% of earnings per share, would this be considered material?" If upon considering other qualitative considerations, the misstatement, as an example, has the effect of switching a net loss to a net income position or increasing management's compensation, it may be considered material. Once it has determined that the error is actually material and a big R restatement is required, which is basically restating all previously filed financials, SEC should be contacted, and the SPAC should also prepare a Form 8-K to announce the reasoning for the new statement. Interestingly, quite a few SPACs have opted for a Super 10-K filing whereby they will restate the financials all within this filing itself instead of filing individual restated 10-Ks and 10-Qs.
NK:You made some great points for SPACs to consider. Can you upon the Form 8-K filing?
AV:Absolutely. Form 8-Ks are used to notify investors of major events, and in this case, it is to inform them of the restatements. It must be filed within four days after concluding that a restatement is necessary because of a change in accounting for warrants. The filing itself should be made under Item 4.02, which would include the date of conclusion relating to the non-reliance. It would also indicate the extended time period the filing relates to and how the SPAC concluded that previously issued financials were misstated. Before the public announcement, SPACs should also contact the SEC once the decision is made. The SPACs may also apply for extension to file restated 10-Ks and 10-Qs.
NK:And what about from an internal controller's perspective and how that relates to any potential restatement of financials?
AV:Thanks for bringing this up. This is definitely one area SPACs should not forget to look into as well. They should evaluate the strength of the internal control environment by performing a detailed risk assessment. Strong controls for SPACs may include the formation of a disclosure committee to discuss items such as the accounting position for warrants. Management should also consider whether there are any internal control deficiencies, both individually or in aggregate, and their severity in order to determine if their assessment on the effectiveness of the internal controls over financial reporting need to be revised on the restated filings.
NK:Having said all that are you anticipating any additional SEC guidance regarding SPACs to be released in the near future?
AV: The recent SEC statement seemed to have caught many companies by surprise, as evidenced by the recent filings of 8-Ks followed by restated 10-Ks and 10-Qs. Many professional services firm have also issued their interpretations and guidance, so there's definitely a lot of resources out there for SPACs to look into. Companies should also keep a lookout for SEC comments in this area over the next few months.
NK:Any last words?
AV: Based on what we have seen so far, our advice for SPACs would be to reach out to their advisors and auditors as soon as possible. Even if a change in classification in warrants or restatement may not be required, it would be good to formalize accounting positions relating to warrants and other issued financial instruments.

Those who have not IPOed yet should not forget to also review their draft warrant agreements with their advisors to ensure that they are comfortable with the accounting positions to be taken. They should also consider running the conclusion by SEC prior to filing the initial S-1.

We have also received really interesting questions from investors in SPACs, which include hedge funds. Common questions include whether typical warrant features may change in the marketplace as a result of the SEC's statement and if their accounting for investments in SPAC-issued financial instruments would change. This is definitely a very interesting area, and the hedge funds should definitely reach out to their advisors for further discussions.
NK:Angela, thank you for this valuable information, and thank you for listening to EisnerAmper's podcast series. For more information on this and a host of other topics, visit and join us for our next podcast.

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