SPAC transactions come to a halt amid SEC repression, hampering retail investors’ interest

SPAC mania came to a screeching halt.

Just last month, the special-purpose procurement firms celebrated a milestone by breaking their 2020 outreach record in just three months. After more than 100 new transactions in March alone, the issuance is almost halted with only ten SPACs in April, according to data from SPAC Research.

The drastic slowdown came after the Securities and Exchange Commission issued commission guidelines that would classify the SPAC warrants as liabilities instead of shares. If it becomes legal, transactions in the pipeline as well as existing SPACs will have to go back and recalculate their money in 10 K and 10 Q for the value of the warrants each quarter.

“SPAC transactions have essentially come to a standstill,” said Anthony DeCandido, partner at RSM LLP. “It’s going to cause these companies to make a lot of money evaluating those warrants every quarter and not just at the beginning of the SPAC. A lot of these groups don’t have the refinement to do it themselves.”

SPACs raise capital in an initial public offering and use the cash to merge with a private company and make it public, usually within two years. Warrants are an agreement sweetener that offers early investors more compensation for their cash.

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 businesses to choose this alternative IPO vehicle – low level of scrutiny and the ability to move fast. Meanwhile, investment confidence in a market that is already highly volatile and often viewed as speculative can be boosted by the revaluation of financial industries.

‘In the world of accounting, it’s one of the biggest challenges you can face when you’ve done your job and then you have to go back and do it, because it’s just a bad outward appearance and raises the level of public confidence you really have want. “DeCandido said,” It’s just investigating what was already a very wrong exit plan in SPACs. “

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

Many SPAC stocks are in a free fall amid the regulatory hit. The own CNBC SPAC Post Deal index, which consists of the largest SPACs that announced a target or those that have already completed a SPAC merger in the last two years, wiped out 2021 profits and by more than 20% dropped to the year to date from Tuesday’s closing.

Signs have emerged that retail investors may be considering SPACs. Bank of America’s customer flow showed that retail SPAC purchases slowed significantly from $ 120 million in weekly net purchases at the beginning of the year to just a few figures in April.

“Early April data suggest retail may return to its ‘traditional’ roots, favoring more established companies over cheaper, speculative securities,” Bank of America analysts said in a note on Monday.

Clover Health, which merged with Chamath Palihapitiya’s Social Capital Hedosophia Holdings Corp. III in January, fell by more than 10% on Tuesday, pushing its 2021 losses to nearly 50%.

SPAC dMY Tech, which takes sports science company Genius Sports under the symbol GENI on Wednesday, dipped more than 11% on Tuesday.

– With the help of CNBC’s Gina Francolla.