SPAC Market Drops Precipitously As US Regulators Eye Deals

It seems like only yesterday global mergers and acquisitions were having their best of times in four decades — with deals of around $1.3 trillion. Providing a big boost in the first quarter of 2021 was the boom in special purpose acquisition companies (SPACs).

While it may not be the worst of times for deals, SPAC activity has slowed to a crawl. A SPAC, or blank-check company, has no commercial operations, but is formed to raise cash and go shopping for an existing company or companies to acquire.

While there were more than 100 new deals in March alone, that number has shrunk to 10 SPACs so far in April, CNBC reported, citing data from SPAC Research.

The sudden change in the investor climate for SPACs came as the Securities and Exchange Commission (SEC) began eyeing the matter. Earlier this month, John Coates, acting director at the SEC’s corporate finance unit, warned of “some significant and yet undiscovered issues” with SPACs.

Last month, the SEC’s Office of Investor Education and Advocacy put out a release cautioning investors “not to make investment decisions related to SPACs based solely on celebrity involvement.” The SEC warned that “celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.”

CNBC said the coup de grace came with the SEC’s new accounting guidance, which would classify SPAC warrants as liabilities instead of equity instruments. If this were to happen, even existing SPACs would have to redo their SEC filings. Warrants offer early investors greater compensation.

“SPAC transactions have essentially come to a halt,” said Anthony DeCandido, partner at RSM LLP. “This is going to cost these companies a lot of money to evaluate and value those warrants each quarter rather than just at the start of the SPAC.”

In the first quarter of 2021, SPACs raked in more than the $83.4 billion they raised in all of 2020, according to industry tracker SPAC Research.