SPAC transactions come to a halt amid SEC crackdown, cooling retail investor interest

Traders work on the trading floor of the New York Stock Exchange (NYSE) on Friday.

Spencer Platt / Staff | Getty Images

The SPAC mania has come to a screeching halt.

Just last month, special-purpose acquisition companies celebrated a milestone by breaking their 2020 emissions record in just three months. After more than 100 new deals in March alone, the issue almost came to a standstill in April, according to SPAC Research, with only 10 SPACs.

The drastic slowdown came after the Securities and Exchange Commission issued accounting guidelines that were designed to classify SPAC warrants as liabilities rather than equity instruments. If required by law, trades in the pipeline as well as existing SPACs would have to recalculate their financial data in 10 Ks and 10 Qs for the value of the warrants per quarter.

“SPAC transactions have essentially stalled,” said Anthony DeCandido, partner at RSM LLP. “This will cost these companies a lot of money to evaluate and rate these warrants on a quarterly basis, rather than just at the beginning of the SPAC. Many of these groups lack the in-house sophistication to do this themselves.”

SPACs raise capital on an IPO and use the money to partner with a private company and get it public, usually within two years. Warrants are a sweetener that gives early investors more compensation for their money.

This potential change in accounting rules could be a major blow to the SPAC market as it could take away the incentives for sponsors and operators to choose this alternative IPO vehicle – little control and the ability to move quickly. In the meantime, adjusting financial data could further reduce investor confidence in a market that is already highly volatile and is often viewed as speculative.

“In the world of accounting, this is one of the biggest challenges you can face when you finish the job and then have to go back and do it because it just looks bad and creates the level of public trust that You really want, “said DeCandido. “It is only further investigating what was already a very misunderstood exit plan in SPACs.”

To make matters worse, according to SPAC Research, over 90% of SPACs have been audited by just two accounting firms, Marcum and WithumSmith + Brow, in the past six years. This could mean a significant backlog as SPACs scramble to comply with new accounting rules.

Many SPAC stocks are in free fall amid regulatory success. CNBC’s proprietary SPAC Post Deal Index, which is comprised of the largest SPACs that have announced a target or that have already completed a SPAC merger in the past two years, wiped out 2021 gains and is up more than 20% liked it. Date from Tuesday end.

There have been signs that retail investors may be concerned about SPACs. Bank of America’s customer flows showed that retail SPAC purchases slowed significantly from $ 120 million a week at the start of the year to just single digits in April.

“Early April data suggests the retail sector may be returning to its ‘traditional’ roots and favoring more established companies over cheaper speculative stocks,” Bank of America analysts said in a statement on Monday.

Clover Health, which formed in January with Chamath Palihapitiyas Social Capital Hedosophia Holdings Corp. III merged, falling more than 10% on Tuesday, increasing its losses to nearly 50% in 2021.

SPAC dMY Tech, which launches sports betting company Genius Sports under the symbol GENI on Wednesday, fell more than 11% on Tuesday.

– With the support of Gina Francolla from CNBC.

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