Category Archives: Hot Topic

Disruption for SPACs – Debt versus Equity and Possible Restatements

Debt versus equity classification for complex financial instruments has caused more public company restatements over the last 15 years than almost any other issue.  SPACs almost always issue warrants in their original formation and subsequent IPO.  These warrants, as it turns out, frequently have complex features that raise debt versus equity questions.

On April 12, 2021, the Acting Director of the Division of Corporation Finance and the Acting Chief Accountant issued a statement – “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”).”

The Statement notes that the staff has recently evaluated fact patterns surrounding SPAC warrants.  It would appear that this review has found situations where SPACs may not have properly accounted for warrants and may need to restate financial statements.  It is important to remember that this complex issue depends on the specific features of each warrant.  Warrants with very similar features can have very different accounting treatments.

The Statement addresses two areas where, if SPACs did not properly apply GAAP, and the amounts involved are material, restatement would be required.  The issues focus on

  1. whether the instruments are “indexed” to the issuer’s equity, and
  2. whether certain redemption provisions could trigger a cash settlement where all equity holders do not participate equally.

The US GAAP “indexation guidance” requires a close link between the fair values of a SPAC’s warrants and equity securities.  If the warrants have features that break this relationship, they are not “indexed to the company’s stock” and must be classified as liabilities.  This technical and complex determination generally depends on the inputs to the warrant’s fair value computation.

The redemption issue focuses on whether a warrant could require a net cash settlement which is outside the control of the issuer.  This generally would require liability classification.  There is an exception to this requirement that if the holders of the warrants and all the underlying securities would receive a cash settlement, equity classification could still be appropriate.  This can be a very complex and technical determination based on the specific provisions of a warrant.

If a SPAC has issued warrants that involve these issues and did not appropriately classify the warrants as liabilities, restatement would be required if the amounts are material.

The Statement provides reminders about the restatement process, related Internal Control Over Financial reporting issues, potential requirements to file an Item 4.02 Form 8-K and communication issues related to Reg FD.

The number of SPAC restatements and the ultimate market impact will unfold in coming weeks.

As always, your thoughts and comments are welcome!

De-SPAC Transaction Liability – A Public Statement from the CorpFin Acting Director

On April 8, 2021, Acting CorpFin Director John Coates issued a Public Statement – “SPACs, IPOs and Liability Risk under the Securities Laws.”

Mr. Coates briefly reviews how SPACs, as shell companies, raise capital in an IPO and use this capital to acquire a private company in a “de-SPACing transaction.”  The de-SPACing transaction is structured so that the SPAC’s public company status and exchange listing survive to the combined entity.  Given the volume and complexity of these transactions, Mr. Coates affirms that the CorpFin staff is “continuing to look carefully at filings and disclosures by SPACs and their private targets.”

He then provides a thoughtful discussion about legal liabilities in disclosures surrounding de-SPACing transactions.  He addresses various “claims” that de-SPACing transactions present reduced liability compared to a traditional IPO transaction.  As an example, part of the discussion addresses how the 1995 Private Securities Litigation Reform Act applies to disclosures, particularly projections, in de-SPACing transactions.  Mr. Coates explores the definition of initial public offering and whether a de-SPACing transaction, where a private company is seen by the public for the first time, could be an initial public offering as contemplated in the 1995 Act.  If this were the case, the 1995 Act safe harbors might not apply to de-SPACing transactions.

There is much relevant discussion along with suggestions for next steps in Mr. Coates statement.

As always, your thoughts and comments are welcome.

ESG and Lending Tied Together in Real Life

On April 6, 2021, BlackRock filed an Item 2.03 Form 8-K disclosing a new credit agreement.  Generally, this is not a particularly newsworthy event.  This agreement though, while increasing the company’s revolving credit line by $400,000,000 to $4,400,000,000, also includes provisions linking the interest rate and commitment fee to various ESG factors.

BlackRock’s lending costs can increase or decrease depending on how well it meets or fails to meet targets related to:

  • Black, African American, Hispanic and Latino Employment Rate,
  • Female Leadership Rate, and
  • Sustainable Investing AUM (Assets Under Management) Amount.

You can find the details of the ESG adjustments in the amendment to the credit agreement filed as an exhibit to the Form 8-K.

You can read more about BlackRock’s ESG perspectives in this Letter to CEOs from BlackRock Chairman and CEO, Larry Fink.

This new lending arrangement puts ESG even more squarely in the spotlight for BlackRock.

As always, your thoughts and comments are welcome.

SPACs in the SEC Spotlight

On March 31, 2021, the SEC published two SPAC related statements:

The SEC’s Acting Chief Accountant, Paul Munter, issued a Public Statement titled “Financial Reporting and Auditing Considerations of Companies Merging with SPACs,”


The Division of Corporation Finance issued a “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.”

Here are highlights of the issues addressed in the two pronouncements.

The Chief Accountant’s Statement addressed considerations in several complex areas related to “de-SPACing” transactions:

Market and Timing, including the challenges that can arise from the limited time a SPAC has to identify an acquisition candidate and the pressures this can create for the candidate to meet the reporting requirements for the de-SPACing transaction and subsequent SEC reporting,

Financial Reporting, including the need for qualified professionals to deal with complex issues frequently found in financial reporting for SPAC related companies,

Internal Control, including both Internal Control Over Financial Reporting and Disclosure Controls and Procedures requirements,

Corporate Governance and Audit Committee issues, with a focus on the need for appropriate board and audit committee oversight after a de-SPACing transaction, and

Auditor matters, in particular the SEC’s requirements for auditor independence as they relate to SPAC transactions.

CorpFin’s Statement focused on:

Shell Company Restrictions, including the requirements for a “Super 8-K” and a reminder that a former shell company will be an “ineligible issuer” for three years following the completion of a business combination,

Books and Records and Internal Control Requirements, with a reminder that after a SPAC related business combination the company will need “the necessary expertise, books and records and internal controls to provide reasonable assurance of timely and reliable financial reporting,” and

Initial Listing Standards of National Securities Exchanges, including reminders about continuing listing and governance requirements.

The issues mentioned above, as well as all the other detailed guidance in both Statements, will be addressed in our April 20 conference, “The SPAC Life Cycle: Business, Legal and Accounting Considerations Forum 2021.”

As always, your thoughts and comments are welcome!

SEC’s New “One-Stop” ESG Web Page

In recent months the SEC has announced a number of ESG iniatives ranging from an increasing focus on ESG matters in the review process to an ESG focused task force in the Enforcement Division.

To help “bring together agency actions and the latest information about environmental, social and governance investing” the SEC has added a new web page – “SEC Response to Climate and ESG Risks and Opportunities.”  You can find a link to the recent “Request for Comment on Climate Disclosure” on the new web page.

As always, your thoughts and comments are welcome!

Human Capital Resources Reminders From the SEC

Thanks to the ever-vigilant Alyson Claybaugh of Intelligize, below are two recent SEC comments focused on human capital resources disclosures.  Both comments relate to Form S-1 disclosures:

Employees, page 132

  1. Please amend your disclosure to describe any human capital measures or objectives that you focus on in managing your business, if material. See Item 101(c)(2)(ii).

Employees, page 100

  1. Please amend your disclosure to provide a more detailed discussion of your human capital resources, including any human capital measures or objectives upon which you focus in managing your business. For example, describe any measures or objectives that address the development, attraction, and retention of personnel. See Item 101(c)(2)(ii) of Regulation S-K. Alternatively, please tell us why you believe you are not required to include this disclosure.

The above comments provide reminders about this now effective requirement in Regulation S-K Item 101:

“A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”

As always, your thoughts and comment are welcome!

CorpFin to Increase Focus on Climate-Related Disclosures

On February 24, 2021, Acting Chair Allison Herren Lee issued this “Statement on the Review of Climate-Related Disclosure.”  In the statement she directs CorpFin to “enhance its focus on climate-related disclosure in public company filings.”  She also refers to the SEC’s 2010 Release FR 82 – Commission Guidance Regarding Disclosure Related to Climate Change.  Acting Chair Herren Lee indicates that experience gathered in the staff’s review of climate-related disclosures will be used to update this guidance.

As always, your thoughts and comments are welcome!

A New Role at the SEC – ESG Senior Policy Advisor

On February 1, 2021, Satyam Khanna was named Senior Policy Advisor for Climate and ESG in the office of Acting Chair Allison Herren Lee.

As noted in this Press Release, in this new role, Mr. Khanna will “advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.”

You can read more about the role and Mr. Khanna’s background in the Press Release.

A New “Dear CFO” Letter – Securities Offerings and Price Volatility

It has been a while since CorpFin issued a “Dear CFO” letter.  These sample comment letters, which historically started with the salutation “Dear CFO,” advise companies about rapidly emerging disclosure and accounting concerns.  On February 8, 2021, with an update in the salutation to “Dear Issuer,” the staff issued this “Sample Letter to Companies Regarding Securities Offerings During Times of Extreme Price Volatility.”

Among the issues the sample letter addresses are:

  • Providing an appropriate description of the volatility of the company’s stock price,
  • Including risk factors addressing price volatility, and
  • Explaining the effects of a potential “short squeeze” on investors.

In these times of volatility and change it will be interesting to see how many “Dear Issuer” letters the SEC promulgates.

As always, your thoughts and comments are welcome!