Blank-cheque companies restate accounts after US watchdog’s warnings

Accounting restatements nearly quadrupled in the US last year and hit a 15-year high, as hundreds of blank-cheque companies were forced by US watchdogs to correct errors in their financials.

Special purpose acquisition companies accounted for 77 per cent of the 1,470 restatements reported to the US Securities and Exchange Commission last year, according to analysis by Audit Analytics. The total is a 289 per cent increase over 2020. Without Spacs, restatements would have fallen 10 per cent.

Not only were there an enormous number of restatements, but a disproportionate share of them were so significant that the companies had to issue a new set of financial statements rather than simply revise previous periods in a new report. The share of such reissuances rose to 62 per cent, the highest level since 2005.

Since the start of 2020, more than 900 blank-cheque companies have floated on US exchanges with the intention of finding a target to merge with. More than 700 Spacs are still looking, according to Spac Research.

But many of those that have closed a deal ended up disappointing investors. The Ipox Spac index, which tracks the performance of Spacs and the companies they merge with, is down more than 45 per cent from its peak in February 2021.

The big jump in Spac-related restatements was driven by two SEC concerns, Audit Analytics found. The watchdog warned Spacs in April 2021 to reconsider the way they were accounting for warrants that gave some investors the right to buy additional shares at a preset price. Spacs had been classifying these agreements as equity, but the SEC said some of them should be treated as liabilities.

Later in the year, the SEC objected to the accounting treatment of a key feature of Spacs, in which investors who don’t like the merger target that the Spac selects can get their money back. The watchdog said such redeemable shares should not be considered permanent equity.

At least 500 companies reclassified their shares and 600 warrant restatements were filed, the Audit Analytics analysis found.

More than 60 class-action lawsuits have already been filed by Spac investors, many of them based on the accounting restatements, according to the Stanford Securities Class Action Clearinghouse.