The SEC has announced that several Special Purpose Acquisition Companies (SPACs) have misclassified warrants issued in IPOs as equity rather than a liability. SPACs that have incorrectly classified the warrants as equity may be required to restate their financial statements if the impact is deemed material.
When warrant classification is changed from equity to liability, they would need to be re-measured at fair value quarterly instead of just at the initial issuance of the warrants when the SPAC is formed. The SPAC would also need to recalculate the value of the warrants for Form 10-K and 10-Q before and after the SPAC’s IPO. Private placement warrants can be valued using a Black-Scholes option-pricing model. However, the inputs would need to consider the probability of a successful merger and other SPAC-specific inputs to volatility, such as those of other comparable SPAC warrants. Public warrants with call or redemption features have path-dependent factors and would more likely need to be valued in a Monte Carlo simulation.
Acuity Advisors valuation professionals have deep experience in valuing equity and warrants in complex capital structures using sophisticated valuation techniques. In addition to revaluing warrants for SPACs, we also provide the following valuation services to SPACs.
Typically prepared by a SPAC’s Board of Directors, a fairness opinion evaluates whether a proposed transaction is fair from a financial point of view. When an entity or operating company is affiliated with the SPAC in some way, such as the same private equity sponsor, a fairness opinion can be an important factor in demonstrating that the Board is fulfilling its fiduciary duties.
Purchase Price Allocations
ASC 805. In SPAC transactions, the operating company is often identified as the accounting acquirer, and the SPAC is the target. However, when the operating company is the target, a purchase price allocation is required.
Mark to Market Requirements
SPACs and operating companies must record debt investments, SPAC warrants, and founder shares of the SPAC at fair value when required.
Acuity Advisors has extensive knowledge of auditors’ documentation requirements, having performed fair value for financial reporting engagements for decades. We work closely with auditors to minimize disruption to management’s time, reduce audit comments and costs, and enable auditors to sign opinions with confidence.
See the full article from the SEC here: Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (SPACs).
If you are interested in learning more about how an experienced valuation advisor can help you navigate these critical and complex issues, we would love to hear from you. Contact Chris Kramer at [email protected] | (714) 380-3300 or Mike Perez at [email protected] | (714) 380-3304.