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U.S. market regulator cracks down on SPAC equity auditing for second time - Reuters

PUBLISHED ON 2021-09-29 01:49:00 EST Arghyadeep

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• SEC is extending crackdown for the SPAC market by changing the audit process expressing concern that fewer regulatory inspections put investors at risk

• Regulators told auditors to treat redeemable shares as temporary equity

• The change is forcing SPACs to switch listings from Nasdaq Capital Market to Nasdaq Global Market


The U.S. Securities and Exchange Commission (SEC) has told major accounting firms and law firms to audit SPACs more strictly for public shares in these shells, Reuters reported on Tuesday, citing multiple industry accountants and lawyers familiar with the matter.

In an effort to expand its crackdown, SEC officials have privately told top auditors of the blank-check acquisition companies that "redeemable" shares issued by these shell firms must be treated as temporary stocks, which was earlier treated as permanent equity for a long time in the industry, the sources told Reuters.


Change in accounting treatment

The change in audit will cause most special purpose acquisition companies or SPACs to fall below the minimum equity capital requirement of Nasdaq's Capital Market tier, forcing the firms to list on Nasdaq to its Global Market tier, which has no equity requirement, the report said.

The latest development is the second time in 2021 that the market regulator has tightened SPAC accounting guidance extending the crackdown on the SPAC deals market, a booming business for Wall Street over the past year and a half.

"It's a change in accounting treatment and a change in the way the SEC views the issue," Jeffrey Weiner, chief executive of Marcum LLP, told Reuters.

Marcum handles over 40% of SPAC audit work, according to data from SPACInsider.


SPAC market

The special purpose acquisition companies are publicly listed shell companies, which take private companies public by circumventing the more traditional and extensive initial public offering process.

In 2021, so far, 443 SPACS raised more than $100 billion in deals. Among those 443 firms, seven have already completed mergers, 75 have announced, and the rest are searching for private entities planning to go public, according to the data from SPACInsider.


SEC crackdown

Earlier, the SEC said the boom in SPAC deals puts investors at risk as there are fewer initial regulatory inspections for these deals than IPOs. Since then, the regulators have increased scrutiny, from SPAC marketing and fees to disclosures, conflicts of interest, and accounting treatment.

In April, the market regulator issued guidance suggesting hundreds of SPACs should account for equity warrants as debt, damping the market.

Officials have questioned whether redeemable shares of the listed blank-check companies should be treated as permanent equity since shareholders have the right to sell those back to the SPAC if they do not like the deal it proposes.

The SEC's new stance of treating redeemable shares as temporary equity aligns with its official guidance on Generally Accepted Accounting Principles (GAAP).

The report said due to some unique terms of SPAC charters, the firms were required to hold a minimum permanent equity balance of $5 million, and auditors for a long time treated the redeemable shares as permanent equity to meet that threshold without objection from the SEC.


Changes in listings

The change in accounting is already forcing blank-check companies to switch listings from Capital Market to Global Market, a Nasdaq spokesperson has confirmed Reuters.

The Nasdaq Capital Market lists companies whose primary purpose is to raise money but requires a minimum capital balance of $5 million, which has to be maintained all the time.

Whereas the Nasdaq Global Market lists companies and has no minimum capital requirement, however, it requires SPACs to have 400 shareholders, 100 more than the Capital Market, which could be problematic for some SPACs.

Nasdaq is working on a rule change that would allow companies to list on the Global Market with 300 shareholders, the spokesperson told Reuters.

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