Investors, companies seem to be abandoning SPACs amid the crackdown
There’s a crackdown on special purpose acquisition companies (SPACs) in the U.S. right now, and it’s weighing on the number of listings. Data from SPAC Research indicates that March had over 100 new SPAC deals, but this month, there have only been 10 so far. [soros] Q1 2021 hedge fund letters, conferences and more Regulators […]
There's a crackdown on special purpose acquisition companies (SPACs) in the U.S. right now, and it's weighing on the number of listings. Data from SPAC Research indicates that March had over 100 new SPAC deals, but this month, there have only been 10 so far.
Regulators Begin Crackdown On SPACs
After only three months, the number of SPACs this year has already broken last year's record for the entire year. The Securities and Exchange Commission started a crackdown on SPACs when it issued accounting guidance classifying the warrants that are part of such deals as liabilities instead of equities.
According to CNBC, the crackdown means any SPAC deals already in the pipeline or existing SPACs would have to recalculate their financial statements in their 10-Ks and 10-Qs to change the value of the warrants in each quarter. There is a chance that the guidance won't become law, which would mean no changes for existing and future SPAC deals. However, the crackdown on SPACs is already having an effect on the industry.
RSM LLP Partner Anthony DeCandido told CNBC that if the guidance becomes law, it will cost SPACs a lot of money to "evaluate and value those warrants each quarter rather than just at the start of the SPAC." He added that many such companies "lack the sophistication internally to do this themselves."
What The Guidance Means For Companies
SPACs start by raising money through an initial public offering, and they use the proceeds to merge with a private company, taking it public in the process. Most mergers must happen within two years of the IPO. Warrants sweeten the deal for early investors, giving them more compensation for the money that they have invested.
If the SEC's guidance becomes law, it would be a significant blow to the SPAC market. It could remove the incentives for operating companies and sponsors to go public through such a deal. Those incentives are a lack of scrutiny and the ability to move fast. Additionally, if SPACs have to restate their financials, investors could become less confident in a market that's already extremely volatile and sometimes seen as speculative.
What makes the situation worse is that only two accounting firms have audited 90% of SPACs over the last six years, according to SPAC Research. That could mean Marcum and WithumSmith+Brown could have a sizable backlog as SPACs scramble to get in compliance with the new accounting rule.
Investors Could Be Giving Up On SPACs Amid The Crackdown
CNBC noted that a large number of SPAC stocks are tumbling due to the regulatory crackdown. The news outlet's proprietary SPAC Post Deal Index has eliminated its gains from this year and is down by over 20% as of the market close on Tuesday.
There have also been other signs that retail investors might be reconsidering investing in SPACs. Client flows from Bank of America indicate that SPAC buying among retail investors has decelerated significantly from $120 million in weekly purchases at the start of the year into the single digits this month.