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A Wave of Earnings Restatements Slams a Hot Market

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More than 540 companies have restated their financial accounts in the past three months, higher than every full year since 2013, to comply with a directive from Washington, new data show.

The guidance from the Securities and Exchange Commission hasn’t had a big impact on investors but has helped cause a big slowdown in one of the market’s hottest areas.

The SEC’s statement targeted special-purpose acquisition companies, saying in April that some were improperly accounting for warrants. The guidance took the market by surprise, according to analysts. Issuance of SPACs has tumbled since. What’s more, some SPACs used the restatements to disclose other more serious problems.

SPACs, or blank-check companies, are shells that raise money and list on an exchange, with the goal of merging with a private firm and taking it public. Many issue warrants as part of the fundraising, giving investors the right to buy stock in the new entity created by the merger at an arranged price. The warrants are seen as an important inducement for investors in what are typically high-risk early-stage companies.

For years, SPACs and companies that had merged with SPACs treated these warrants as equity in their financial statements. The SEC in April said certain features of many of the warrants, such as better terms being offered to sponsors than outside investors, meant they should instead be treated as liabilities. One reason is that there is the potential for a cash payout in some circumstances.

An SEC spokesman said the issue addressed in its April statement was “not a new accounting question.” Guidance on how to classify warrants was included in accounting rules more than a decade ago, the spokesman said.

SPACs were booming when the SEC dropped its accounting bombshell. The regulator’s guidance forced a scramble among auditors and lawyers, as companies had to rethink their treatment of warrants before going public or completing mergers. At the same time, shares of popular companies tied to SPACs were tumbling, helping to stall new issuance.

The monthly amount raised by new blank-check companies plummeted from $35 billion in March to $3 billion in April and has yet to recover, according to data provider Dealogic. SPACs raised $3.9 billion in May and $3.2 billion in 2021 through June 24, the data show.

“The SEC statement had the impact of immediately stopping the SPAC market—it shut everything down,” said

David Larsen,

a managing director at valuation firm Duff & Phelps LLC. “We’re still dealing with the aftermath.”


What’s your approach to investing in SPACs? Join the conversation below.

Deals are still getting done, with a steady stream of SPACs taking companies public in recent weeks. The slowdown may have helped take some of the speculative froth out of the market, according to analysts. “It allowed people to take their breath in a superheated market,” Mr. Larsen said.

More than 540, or almost three-quarters, of active SPACs and companies taken public by SPACs have restated their financials to comply with the SEC rules. Of those, more than 200 have made a less serious type of restatement that doesn’t require alerting investors, according to an analysis by data provider Audit Analytics.

Several companies taken public by SPACs, including electric-truck maker Lordstown Motors, have restated serious aspects of their financials.


rebecca cook/Reuters

A further 330 SPACs and SPAC targets have done the most serious type of correction—the kind for which a company has to alert investors and reissue its financial statements. That is more such restatements, in less than three months, than the annual total for all companies in every year since 2010, the analysis found.

Several companies taken public by SPACs also have restated other more serious aspects of their financial statements. Electric-truck startup

Lordstown Motors Corp.

disclosed in June “substantial doubt” about its ability to continue as a going concern through the end of this year. The company’s two top leaders later resigned over inaccuracies in the way it recorded preorders for its truck. Lordstown last month said it felt it had enough funding to carry it through May 2022 and was still trying to raise money.

‘It’s been highly disruptive to the market and a huge distraction for companies. But investors are not fazed by these countless restatements.’

— Joel Rubinstein, White & Case partner

Investors typically send stocks tumbling after major restatements, academic research has found. But these SEC-induced revisions are different.

“It’s been highly disruptive to the market and a huge distraction for companies. But investors are not fazed by these countless restatements,” said

Joel Rubinstein,

a partner at law firm White & Case.

One reason is that SPACs are shell companies designed only to do deals. For SPACs that have yet to do a deal, investors typically don’t base their decisions on the companies’ financial performance, but instead judge the executive team.

There is continuing fallout from the SEC action: Treating the warrants as liabilities means they will have to be revalued every three months, when the company reports its latest financial results, as opposed to the one-off value if the warrants are included as equity.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ

Write to Jean Eaglesham at [email protected]

Corrections & Amplifications
Lordstown Motors said in June that it felt it had enough funding to carry it through May 2022. An earlier version of this article incorrectly said the statement was made this month. (Corrected on July 2.)

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