Special Purpose Acquisition Companies (SPAC) had, until recently, demonstrated unbroken growth as a popular alternative to conventional initial public offerings (IPO). Although SPACs offer certain advantages over traditional IPOs, they are not without drawbacks, which have been addressed by recent SEC regulations limiting the use of financial forecasts and improving complex and somewhat ambiguous reporting requirements. While many investors have sustained heavy losses, the authors anticipate a renewed interest in SPACs, albeit subject to greater regulatory scrutiny and more rigid disclosure requirements. This article provides an overview of SPACs and an introduction to the accounting challenges these intriguing merger vehicles present.
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In 2022, a significant decline in stock valuations was seen as a result of high inflation reaching a peak a few months ago of almost 9%, as measured by the Consumer Price Index. Indeed, the Federal Reserve is in the midst of restrictive monetary policy and has raised the federal funds rate by 3.75%, with plans for further rises of 25 basis points. The debate among economists, financial analysts, and market followers concerns whether the Federal Reserve can curb inflation without a recession, a so-called soft landing. Despite a lackluster stock market, eventually, strong economic activity with manageable inflation will lead to rising share prices and, with it, a demand for initial public offerings including SPACs. Thus, we would anticipate a renewed interest in SPACs, albeit subject to greater regulatory scrutiny by the SEC, and more rigid disclosure requirements in SEC filings.
Although many SPAC mergers have benefitted all parties, many SPAC mergers have resulted in sizable losses to investors who holding their shares post-merger saw precipitous drops in the merged entity’s share price. During the dramatic rise in share prices between 2005 and 2020, SPAC mergers rose 275% to an all-time high of $51.5 billion (Data from Refinitiv). The same database indicates that by volume, U.S.-listed SPAC IPOs accounted for more than half of overall U.S. listed IPOs in 2020 and close to 50% of proceeds raised.
What accounts for the popularity of SPACs over traditional IPOs? Merging with a SPAC has several advantages:
- SPAC mergers can usually be accomplished in three to four months, versus a traditional IPO, which can take up to a year.
- Given the faster time to consummate a SPAC merger, the underwriting fees are typically lower.
- SPAC IPOs might provide greater certainty in terms of setting merger consideration and determining valuation at the time the agreement is executed.
- Detailed financial projections are included in the SPAC proxy registration statement that are not permitted in a traditional IPO filing.
- Fewer restrictions on business combination discussions.
In addition to recent SEC scrutiny, SPAC mergers have disadvantages as well:
- Interests of the SPAC sponsors and promoters can conflict with third-party investors.
- Sponsors receive founder’s shares for nominal consideration, allowing sponsors to profit even if the future acquisition proves unsuccessful, at the expense of third-party investors.
- Redemption rights create uncertainty about the funds available to pay for the transaction and related costs.
- The combined entity will likely have to treat issued warrants as liabilities.
Financial reporting in this area is somewhat limited to a few paragraphs of ASC Topic 805 that provide guidance about consolidation, and criteria for identifying the acquirer and acquiree parties to the transaction for accounting purposes. The amount of detail required by the SEC in the registration filing is similar to traditional IPOs, albeit with some important requirements unique to SPACs.
This article will explain the nature and structure of SPAC mergers, followed by a discussion of SEC reporting requirements. This will be followed by a consideration of how to identify the accounting acquirer and acquiree to the transaction, which could conceivably differ from their legal identities and affect the recognition and measurement of the transaction. Which party is the acquirer and which is the acquiree materially impacts how the merged entity accounts for the transaction. Next, the article will focus on the nature and classification of the shares and warrants issued in connection with the transaction, including a discussion of the relevant guidance under ASC 480 and an evaluation of the potential SEC requirements to treat the issuance of shares or warrants as liabilities. The authors conclude with an analysis of the existing guidance, anticipated changes in that guidance, and suggested changes and related disclosures.
Nature and Structure of SPAC Mergers
The creation of a SPAC typically goes as follows: A private equity or hedge fund with a reputation for identifying successful private companies forms a legal entity that raises cash in an IPO. The legal entity is structured as a non-operating public shell entity because its only material holdings are cash and cash equivalents. Cash is placed in an interest-bearing trust and used to purchase a fully operating private entity. The private equity or hedge fund is the financial sponsor of the SPAC, and the private entity acquired is the target. As defined in its proxy and registration statement per SEC Form S-4, SPAC management (i.e., the sponsoring entity) has a relatively short period of time to locate a target company, usually two years. If it fails to consummate a transaction, the SPAC is liquidated and the cash (assuming any is available) is returned to the equity participants. Though initial funding is obtained by the SPAC going public, additional capital for the acquisition may be required. In many cases, the SPAC will seek fresh equity through a private placement referred to as a Private Investment in a Public Equity (PIPE). In its IPO, the sponsors and the affiliated investor groups receive common equity in the SPAC in the form of Class B shares and may purchase warrants to acquire Class A shares at an exercise price of, for example, $11.50 per share—this, as one consideration for their efforts in forming the SPAC. At the same time, the SPAC will issue units to third-party investors, for example, at $10 per unit, that will each typically consist of one Class A share and a fraction of a warrant to acquire additional Class A shares at the exercise price of $11.50 per share. The warrants purchased by the sponsor (and any affiliated group) are considered “private placement warrants”; those purchased by third-party investors are considered “public placement warrants.” Holders of Class A shares have the right to redeem their shares at the amount at which they were purchased. Additionally, if the SPAC fails to consummate within its specified time to complete the transaction, then the SPAC must liquidate its assets and return funds to the holders of Class A shares. If the SPAC is successful at completing a business combination with the target company, the Class A holders have the right to redeem their shares before the effective date of the combination. Like the Class A shares, the Class B shares issued by the SPAC are generally considered temporary equity unless they are deemed mandatorily redeemable by the holders. In which case the obligation to redeem the shares would warrant their classification as liabilities. Moreover, if an unconditional obligation exists for the SPAC to deliver a variable number of shares to the holders, such obligation will also warrant liability classification. The classification issue is discussed in more depth below.
SPAC mergers can usually be accomplished in three to four months, versus a traditional IPO, which can take up to a year.
The process of identifying and acquiring a private company is referred to as de-SPACing. After the SPAC sponsor identifies a target, itself looking for a merger and seeking capital, the sponsoring management must file a letter of intent (LOI), forge a merger agreement, and seek the approval of all shareholders (i.e., Class A and Class B holders) via soliciting proxies. The proxy statement would include financial information about the target company as well as the SPAC. Before submitting the proxy statement to shareholders for a vote, the statement must be approved by the SEC on Form S-4 (if the combined entity is a U.S. resident; Form F-4, if a foreign resident). Care must be taken to determine the residency of the issuer because the combined entity, once formed, must prepare its annual report in accordance with U.S. GAAP or IFRS. Moreover, if the target company is a foreign entity that prepares its reports according to its local GAAP or IFRS and the combined entity is deemed a U.S. issuer, the financial statements of the target company would have to be converted to a U.S. GAAP basis. Of course, the annual filings of the combined entity will depend upon its status post-combination. If the combined entity is deemed a U.S. issuer, it will formally document its announced business combination on a Super 8-k; if deemed a foreign issuer, it will use a Super 20-F. Independent audits must be prepared in accordance with the PCAOB.
What content must be included in the soliciting proxy S-4 (submitted to the SEC pre-business combination) and the Super 8-k (submitted to the SEC post business combination)? Although the amount of detail required is no less cumbersome than a traditional IPO, some features are unique to the SPAC merger warrant discussion; these are covered below.
SEC Financial Reporting Requirements for SPAC Mergers
Number of years included on Form S-4:
The proxy-registration statement must include audited income statements and statements of cash flows for the latest three fiscal years, and audited balance sheets for the latest two fiscal years. If, as is often the case, the target company is a private company and meets the criteria of a small reporting company (SRC), only two years of audited financial statements are required under SEC rules. To qualify for SRC status, the target must have less than $100 million in revenue for each audited income statement included. Another exception to the three-year rule is if the target is an emerging growth company (EGC) under the Jumpstart Our Business Startups (JOBS) Act of 2012. To be classified as an EGC, the target company must have revenue less than $1.07 billion in its most recent fiscal year and must not have issued more than a $1 billion of nonconvertible debt. An additional requirement for EGC status is that the SPAC have no debt issue greater than $700 million. If the target meets these criteria, only two years of audited financial statements are required.
Interim requirements in Form S-4.
Depending upon the filing date, the SEC requires unaudited interim financial statements over a designated period to supplement the comparative annual audited statements included in the proxy registration. If the S-4 is filed within 45 days from the end of the latest fiscal period, then the audited comparable financial statements of the prior fiscal years are considered current but must be supplemented with interim financial statements for a nine-month period of the latest fiscal year. If the filing date exceeds 45 days, the prior-year audited financial statements are considered “stale,” and would have to be supplemented with unaudited interim financial statements for the most recent quarter of the latest fiscal year and a comparable period for the prior year.
Pro Forma Statements
17 CFR section 210.11-01 (Article 11 of Regulation S-X) requires the reporting of pro forma information. Additionally, if the company meets the criteria of an SRC, then information in accordance with 17 CFR section 210.8-05 (Rule 8-05 of Regulation S-X) may be provided. Per these SEC provisions, the pro forma balance sheet should be based on the latest balance sheet that is included in the filing. A statement of comprehensive income based on the latest fiscal year as well as interim period is also required. Prior to May 2020, SEC rules required that any adjustments made to pro forma income had to have a recurring impact. Subsequently, the SEC ruled that pro forma adjustments need not be expected to have a recurring impact on annual revenue. However, the registrant must disclose any non-recurring information beyond 12 months after the transaction with respect to revenues, expenses, gains and losses, and related tax effects. The registrant must also disclose any pro forma adjustments and estimates in the accompanying notes. According to Article 11 of Regulation S-X, various pro forma financial scenarios must be created to capture the uncertain elements of the transaction (i.e., differing levels of redemption of Class A shares, underwriting, and other fees). Careful attention in determining the accounting acquirer versus acquiree, discussed below, is vital in correctly presenting the pro forma statements.
Super 8-k requirements.
Once the proxy/registration statement has been approved by the SEC and shareholders have voted on the transaction, a Super 8-k must be filed within four days of the consummation. Much of the information found in the proxy/registration statement is the same as what will be filled out on the Super 8-k, with some additional reporting/disclosure requirements. An 8-k is required whenever there is an event that puts a public company in the position in which they are obligated to file a report to inform shareholders of material changes. The difference between a Form 8-k and a Super 8-k (see https://www.sec.gov/fast-answers/answersform8khtm.html) is that the latter includes a Form 10. At bare minimum, the combined company must report under Form 8-K Items 2.01 (Completion of Acquisition or Disposition of Assets) and 5.06 (Change in Shell Company Status). Further, they would need to evaluate if other items need to be reported (see https://www.sec.gov/files/form8-k.pdf).
Interests of the SPAC sponsors and promoters can conflict with third-party investors.
The combined company is not permitted the 71-day extension that is typically available for acquired companies; therefore, financial data should be ready before consumption is completed. The company must understand the aging of its financial statements as well as the other requirements set forth by the PCAOB. Specifically pertaining to the entity’s financial reporting, minimum and maximum values that were presented in earlier periods to show various redemption levels that resulted in temporary equity should be eliminated.
Upon filing of the company’s proxy and registration statement, a determination should be made regarding whether the reporting entity needs to update any of its financial reports; this will depend on the age of financial statements (as discussed above), as well as the SPACs filer status. The combined company will need to evaluate whether an amended Super 8-k is needed to avoid gaps in the target’s reporting. The due date for the amended Super 8-k depends upon the SPACs filing status.
Identifying the accounting acquirer in SPAC mergers.
When cash or securities are tendered in a business combination, it is a foregone conclusion that the entity transferring the cash or incurring liabilities is the acquirer in a legal—as well as an accounting—sense. This is not as clear-cut when equity is issued as consideration. In effect, the legal identities of the parties may differ from their respective accounting identities. This can be particularly problematic with respect to SPAC mergers. Identifying the acquirer and acquiree in turn affects how the transaction is accounted for. The combined entity will account for the transaction in one of the following ways: 1) a business combination, 2) an asset acquisition, or 3) a reverse recapitalization.
ASC 805-10-55-12 and ASC 805-10-55-13 provide guidance in identifying the accounting acquirer and acquiree. The criteria in ASC 805-10-55-12 include the composition of the combined entity’s board of directors and executive management team, the extent of the non-controlling interest, the relative voting rights in the combined entity, and the terms of exchange of equity interests. The criteria in ASC 805-10-55-13 include the relative size of the assets, revenues, and earnings of each entity. In many instances, however, some of the above criteria will suggest the target is the acquirer, while others will suggest the SPAC; thus, the relative importance of these factors is a matter of judgment. At some point in the future, FASB might update this guidance by assigning weights to the above criteria or including examples of how to weigh the factors in particular contexts.
In effect, the legal identities of the parties may differ from their respective accounting identities. This can be particularly problematic with respect to SPAC mergers.
If the SPAC is determined to be the accounting acquirer (and thus the target the acquire), the combined entity will account for the transaction as either a business combination or an asset acquisition (ASC 805-10-25-1). In most cases, the target meets the definition of a business under ASC 805-10-55-3A and is guided by criteria in ASC 805-10-55-4 to -6 and 805-10-55-8 to -9. Under ASC 805-10-05-25-1, the acquirer will account for the business combination using the acquisition method, adjust the net assets of the acquiree to fair value, assign a portion of the fair value to the non-controlling interest, and record any excess of consideration paid over the fair value of the net assets as goodwill. If the target is not deemed a business (more the exception than the rule), then the acquirer will account for the transaction as a “purchase of assets” and measure the acquired assets at fair value on the purchase date.
In SPAC transactions, the target is often identified as the “predecessor entity,” in that the SPAC does not meet the requisites of a business because it has no operating assets; its only material assets are cash and, possibly, securities, which are placed in the trust account when the SPAC IPO is established (prior to identification of the target). If the combined entity determines that the SPAC is the accounting acquiree, then the combined entity must account for the transaction as a reverse recapitalization under ASC 805-40-45-1 to -2. As such, the basis of the combined assets and liabilities is the carrying value of the target company’s assets and liabilities as well as the cash proceeds and securities raised by the SPAC upon its formation. Any retained earnings, common stock, and other equity components before consummation of the transaction are reduced proportionately by any of the target’s pre-existing non-controlling interests. The contributed capital (i.e., common equity plus additional paid in capital) of the combined entity is the sum of the target company components plus the net proceeds received from the SPAC.
Treatment of target acquisitions pre-consolidation.
Reporting requirements related to SPAC mergers must consider any acquisitions by the target company that occurred prior to consolidation. If they are considered significant, the audited financial statements of the target company’s acquisitions must be included in the proxy/registration statement approved by the SEC and then the shareholders. Regulation S-X Rule 1-02(w) requires the target to provide significant tests on the levels of investment, assets, and income of its pre-consolidation business acquisitions relative to its combined investment, assets, and income. If the significance level exceeds 20% of the total on any of these tests, the audited year-end financial statements for these targets as well as any audited interim financial statements for these entities, must be included. Given the cost and complexity of complying with this requirement, the SEC provided a practical expedient that limits the target’s evaluation to those acquisitions made after the completion of its most recent audited financial statements.
Example. Assume that the entity A is a target of a SPAC transaction, and A had acquired entity B. Both have calendar year-ends. Accordingly, the S-4 would include audited balance sheets as of December 31, 2021, and December 31, 2020, and audited income statements and statements of cash flows for the three years ended December 31, 2020. Because the most recently completed interim period is September 31, 2022, Form S-4 would include unaudited interim financial statements for the periods ending September 30, 2022, and September 30, 2021. Assume further that entity B was acquired in July 2020. Since this acquisition was completed by entity A before December 31, 2021, audited pre-acquisition financial statements would not be required. If the acquisition of B, had occurred in July 2021, five months before the end of the most recent year end, however, A would have to evaluate the significance of the acquisition by determining whether the proportion of B’s investments, assets, and income, compared to A’s, exceeds 20%. If it was found to be 50%, for example, B’s audited annual financial statements for 2020 and 2019, as well as any audited interim financial statements, would have to be included in the proxy/registration statement.
Classification and Treatment of Share Issuances and Warrants
Nature of shares and warrants.
Typically, SPACs issue two classes of equity: Class A and Class B. The SPAC issues units to third-party investors at (e.g.) $10 per unit in the above example, which commonly consists of a Class A share and a fraction of a warrant that entitles the holder to acquire Class A stock at a set exercise price of (e.g.) $11.50 per share. It issues Class B shares to the sponsor and affiliated groups in consideration for their efforts in forming the SPAC. Additionally, they can acquire warrants at (e.g.) $1.50 each, giving them the right to purchase shares of Class A stock at an exercise price of $11.50 per share.
In most cases, both classes of stock are considered equities. Because Class A shares can automatically be liquidated by the SPAC in the event it fails to complete the merger or be redeemed by the holders if they exercise their right to do so, their classification for accounting purposes can be either liabilities or equities. In most cases, their issuance will result in the latter. At issuance date prior to consummation of the merger, they are classified as temporary equity. Once the merger is consummated, and assuming no redemption contingencies remain going forward, these shares would become permanent equity. Their issuance could result in a liability classification if they are deemed mandatorily redeemable financial instruments (ASC 480-10-25-4) or their issuance could result in an unconditional obligation of the SPAC to deliver a variable number of shares (ASC 480-10-25-14). Liability classification, however, would be more the exception than the rule.
Unlike Class A shares, Class B shares are generally not redeemable; if the merger efforts are unsuccessful, the shares will be worthless, and the holders will receive nothing. If the merger is successful, the shares will be classified as permanent equity.
Whether to treat the warrants issued as liabilities or as equity is related to the complex issue of whether they are public or private placement warrants.
Nature and classification of warrants.
Warrants purchased by the sponsors of the SPAC are recognized by the SEC as private placement securities; the portion of the units purchased by the third-party investors and included in the price that represents the warrant is recognized as a public equity instrument (see https://bit.ly/3YElkNb). Whether to treat the warrants issued as liabilities or as equity is related to the complex issue of whether they are public or private placement warrants. In the latter case, private placement warrants do not carry any redemption provisions; thus, they would be considered temporary equity. In evaluating whether public warrants should be afforded liability treatment or temporary equity treatment, the SPAC must consider the guidance in various provisions of ASC 480 and ASC 815. ASC 480-10-25-8a requires that public warrants be classified as liabilities if the entity incurs an obligation to either repurchase the issuer’s equity shares or if the derivative warrant is indexed to such an obligation; ASC 480-10-25-8b requires that the resulting obligation be settled by transferring assets. Such an evaluation in turn depends upon whether the warrants are in the money and when they are likely to be exercised. If exercised before the merger, they would be classified as liabilities, because the A shares, once issued, can be redeemed by the holder. If exercised after the merger, the shares would become permanent equity and not redeemable. Classification does not end at this point, however, as the SPAC entity must evaluate whether they require liability treatment under ASC 480-10-25-14, or else possibly under ASC 815-40-15. Because the warrants are structured to deliver a fixed number of shares at a fixed price and do not represent an obligation to issue a variable number of shares, it is unlikely that this guidance will result in a liability classification. A liability is more likely to result if the evaluation of the public warrants under ASC 815-40-15 is determined to not be indexed to the underlying Class A equity. Thus, the value of the warrants must be independent of any observable market or observable index (ASC 815-40-15-7A).
Accounting for the Share Issuances and Warrants
After the SPAC IPO has been completed, the Class A shares and warrants purchased as units by third parties become separately tradable; in effect, they are legally distinct. Per ASC 480-10-20, the public warrants meet the definition of a freestanding financial instrument. As such, upon issuance of the units, the warrants could be classified as liabilities or equities, depending upon certain criteria in ASC 480-10-25-4. How the warrants are classified for financial reporting purposes in turn affects how to account for the proceeds from issuance of the units. Because the units issued consist of one Class A ordinary share and a fraction of a warrant, the proceeds must be allocated between the shares and the warrants. If the warrants are to be classified as liabilities, the SPAC must determine the fair value of the warrants first, and then the difference between the issuance price and fair value of the warrants is allocated to the Class A stock. Subsequent changes in the fair value of the warrants as liabilities appear on the income statement. Regarding Class A stock, if the merger is consummated and the probability that the shares will be redeemed is all but certain, ASC 480-10-S99-3A requires that the value of the shares be re-measured to their redemption amount as if the first reporting period after the IPO was the redemption date. Alternatively, if the SPAC expects the business combination to occur at a certain date, it can accrete changes in the difference between the initial carrying amount and the redemption amount from the IPO date to the redemption date. Such re-measurement is necessary because proceeds from issuance of the units are allocated first to the warrants, causing the value assigned to the Class A stock to be less than the redemption amount.
If the public warrants can be classified as equity instruments, the SPAC must determine the stand-alone fair values of the warrants and the Class A stock. Once it has determined these values, it will allocate the proceeds to the warrants and the shares based on their relative stand-alone values.
An incorrect analysis of the accounting identities of the respective parties can in turn lead to misleading financial statements, as well as poor credit and investment decisions.
Evaluating Problematic Areas in Existing Guidance
Criteria for evaluating accounting acquirer and acquiree.
As mentioned above, the accounting identities of acquirer and accounting acquiree might not correspond with their legal identities. Although the existing guidance contained in ASC 805-10-55-12 and 55-13 clearly identifies the parties in some transactions, application of the criteria often leads to conflicting judgments in others. For example, the composition of the governing body and relative voting rights in the combined entity may identify one as the acquirer, whereas the composition of senior management and terms of the exchange of equity interests may indicate the other. An incorrect analysis of the accounting identities of the respective parties can in turn lead to misleading financial statements, as well as poor credit and investment decisions.
We suggest that the FASB provide further guidance in this area, possibly crafting updated guidance that would provide weights to the criteria in terms of their relative importance. Comments from stakeholders through the usual standards setting process could provide helpful input on such a hierarchy. Alternatively, the Board might analyze recent SPAC mergers and develop implementation examples indicating the importance that should be placed on certain criteria in certain contexts.
Identification of noncontrolling interests.
It is common to find the sponsoring entities of SPACs to be businesses themselves, thereby requiring the sponsoring entity to consolidate its accounts with those of its SPACs. Any shares issued by the SPAC that are not owned by the sponsor would represent non-controlling interests in the consolidation, whereas any equity issuances by the sponsoring entity related to majority-owned subsidiaries would require elimination entries. Consolidation can become quite complicated when the sponsoring entity (a business) has several subsidiaries and the target in the combined SPAC merger has several subsidiaries and non-controlling interests as well. Application of the existing guidance in ASC 810 and 480 regarding recognition and measurement issues can become quite complex. ASC 480-10-S99-3A provides guidance regarding how to resolve recognition, measurement, and determination of EPS. Given the relative importance of SPAC mergers, as well as the increased scrutiny from the SEC, FASB is likely to issue new updates providing greater clarity, practical expedients, and—especially—more extensive disclosure requirements.
Earn-out arrangements.
To enhance the interest of SPAC as well as target investors, the combined entity may issue additional shares to either party contingent upon the attainment of certain income, revenue, or stock price thresholds. When issuances are contingent upon share price, if an outside entity purchases the combined entity resulting in a change in control, the price paid for the acquisition replaces the benchmark price in evaluating whether the threshold has been met. This raises the question of how to account for the contingent shares. Because issuance of the shares is conditional upon, for example, the level of the combined entity’s stock price, these arrangements are classified for accounting purposes as equity-linked transactions. If the holder owns shares subject to the contingency (i.e., owned prior to the merger transaction), however, subsequent failure of the entity’s stock price to reach the targeted level could result in the holder forfeiting the shares. Here, the principal accounting issue relates to the classification of the equity instrument, specifically whether to treat the contingent shares as a liability or as temporary equity. Such determination is informed by ASC 815-40-7A:
An exercise contingency shall not preclude an instrument (or embedded feature) from being considered indexed to an entity’s own stock provided that it is not based on either of the following:
- An observable market, other than the market for the issuer’s stock (if applicable)
- An observable index, other than an index calculated or measured solely by reference to the issuer’s own operations (for example, sales revenue of the issuer; earnings before interest, taxes, depreciation, and amortization of the issuer; net income of the issuer; or total equity of the issuer).
Thus, the equity-linked instrument must be linked to the combined entity’s stock price and have no relationship to any other equity or equity index. If these criteria are met, the instrument can be treated as temporary equity; if these criteria are not met, then the contingent shares must be treated as liabilities.
Looking Ahead
There are several items to consider when using SPACs as a vehicle for facilitating mergers: SEC filing requirements, such as Super 8-K and other financial statement requirements; identifying and distinguishing the accounting from the legal acquirer; accounting for shares and warrants issued, including classifying A and B shares; share-based compensation; and disclosure controls and procedures. The above discussion attempts to clarify some of the principal considerations in SPAC mergers, as well as the advantages and disadvantages of the vehicles. The discussion above provides a blueprint of the various aspects of SPAC mergers, but should be viewed a merely starting point for understanding and evaluating them. Going forward, despite a recent trend away from SPAC mergers—amid significant losses incurred by third-party investors and increased SEC scrutiny—they offer a vehicle through which many promising startups can gain access to equity markets. Given the proliferation of technology, health, and clean energy startups, it is beneficial to have more than one way to an IPO. The success of SPACs in attracting equity capital will require a more level playing field. To achieve a more level playing field, SPAC sponsors might purchase a lower interest in the merged entity as well as pay a higher price than the typical $10 purchase amount. In this regard, financial reporting will require greater disclosure of the sponsors’ and other principals’ interest in the proposed merger.
Despite a recent trend away from SPAC mergers—amid significant losses incurred by third-party investors and increased SEC scrutiny—they offer a vehicle through which many promising startups can gain access to equity markets.
With respect to the problematic areas discussed above, FASB might consider an update that would all consolidate current guidance in one place. The criteria regarding the classification of warrants, and to a lesser extent equity that is issued prior to the merger, needs further clarity. Here, FASB might provide implementation examples that would allow users to better evaluate when issued warrants would result in recognition of equities, and when they would result in liabilities. FASB is no doubt in the process of developing specific guidance regarding account measurements, classification, and disclosure of SPAC mergers. Because SPAC transactions are not restricted to the U.S. domestic market, collaboration with the IASB would improve the comparability of financial reporting in this area.
