For the last few months, there has been a surge of blank check companies or SPACs (Special Purpose Acquisition Companies) going public. However, it has gone very quiet since early April as the Securities and Exchange Commission (SEC) has now weighed in.

On April 12, the SEC issued a staff statement that stated that some of the SPACs had accounted for warrants incorrectly in their Initial Public Offering.  They should have been accounted for as a liability, instead of equity.

Certain contracts, such as warrants, may be settled in the stock of the entity. They can be classified as equity, rather than as a liability, but it depends on the fact pattern. For instance, an equity-linked financial instrument must be indexed to the entity’s own stock in order to qualify for equity classification.

For some SPACs, the warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants.

In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), 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. Therefore the tender offer provision would require the warrants to be treated as a liability measured at fair value.

Local companies restating

Among a slew of SPACS that have filed that they will restate their financial statements are two Houston-area companies, Landcadia Holdings III and Genesis Park Acquisition Corp.

Landcadia III (a Tilman Fertitta SPAC) went public in October 2020, raising $500 million. In January, it agreed to take The Hillman Group in a deal valued at $2.64 billion. The company has already filed its restatement. At December 31, 2020 it increased its liabilities by $56 million. It recorded the offset as a loss (non-cash change in fair value of warrant derivative liability).

Genesis Park went public in November 2020 in an $150 million IPO. In March, it agreed to take Redwire, a space technology company, public in a $615 million deal. Genesis has not yet quantified the amount of the restatement.

[UPDATE 5/8/21]

Two more Houston-based SPACS have restated their financial results.

• Good Works Acquisition Corp ($150 million IPO) booked a $9 million warrant liability and a loss of $1.2 million on the fair value).
• Peridot Acquisition Corp ($300 million IPO) booked an $18 million liability and $22.5 million loss on the fair value.

Good Works has announced plans to take Cipher Mining public while Peridot is doing the same with Li-Cycle.

SEC and Financial projections

The SEC is also weighing a crackdown on the projections made when a SPAC takes a private company public (also called a de-SPAC). In a public statement made on April 8, John Coates, the acting SEC Director, Division of Corporation Finance stated that the heightened scrutiny placed on projections in a traditional IPO should also apply to the de-SPACs. While this is not yet a public policy, it is clear where the SEC is headed.