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The latest accounting mishap for SPACs stems from mis-classifying the over-allotment option—an incentive program that allows underwriters to purchase additional shares at a discount following the IPO. While this is a pervasive practice, the errors should not prove as widespread as the regulatory overhaul from warrant reclassification or the incorrect classification of Class A shares.
SPACs need to initially record the over-allotment option as a liability during the 30-to-45-day incentive period before being recorded as a gain. Once underwriters take advantage of the option and buy all the shares, the liability disappears and, as Partner Scott Norris noted, that narrows the number of firms that have to look out for errors.
And with the amount of attention from all sides, Norris said it’s no surprise SPACs are still running into reporting issues, as the extra scrutiny uncovers financial reporting problems in places the market previously overlooked. “In the past when this occurred, no one did anything with this because no one thought this through,” he said. “But now, because we’re obviously very focused on SPACs, the SEC is very focused on SPACs, and they’re very focused on accounting for SPACs, this is a little accounting nuance that has created some hiccups.”
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