Avoiding the Latest SPACs Pitfall

More than 540 companies have restated their financial statements in the past three months, more than each calendar year since 2013.

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More than 540 companies have restated their financial statements in the past three months, more than each calendar year since 2013.

FEI Daily spoke with Demetrios Frangiskatos, Co-Leader of BDO’s SPAC Assurance practice about how the restatements are affecting SPAC activity and what to expect going forward.

FEI Daily: How are restatements affecting SPAC activity?

Demetrios Frangiskatos: After guidance was issued by the SEC in April 2021 about how SPACs need to classify their warrants as liabilities instead of equity instruments, new and upcoming “blank check” deals were suddenly under increased scrutiny. At the time, many discussed how this could potentially impact financial statements and cause restatements, something we have seen come to pass in recent months.

After the SEC’s announcement, the market saw a decline in SPAC listings in the second quarter of 2021 as investors shied away from an asset class that was under such close examination by regulators. While SPAC market activity is starting to pick up again now, the expectation of future regulations around disclosures as it relates to SPACs – combined with a natural slowdown after an explosion in activity – is likely to keep the market cooled down as compared to Q1 2021 but still moving at a steady pace.

FEI Daily: How should companies notify investors when a restatement is necessary?

Frangiskatos: When a restatement is necessary, the biggest problem is that the previously issued financial statements cannot be relied upon and any party that uses those statements, such as investors, need to be notified of that fact. For an SEC registrant, this notification is accomplished by filing an Item 4.02 Form 8-K, also known as a non-reliance on previously issued financial statements or a related audit report or completed interim review. The form must be filed within 4 business days of the determination by the entity or its auditor that a restatement is necessary.

Once an error has been identified, companies should consider whether and how the identified error affects the design and effectiveness of its related internal controls, as this error indicates that some aspect of the internal control design or execution was not properly functioning. If the controls are determined to be deficient, management should take steps to rectify this immediately.

FEI Daily: What is the CFO and finance team’s role?

Frangiskatos: Ultimately, the CEO is the leader of the organization, and so holds responsibility for the company’s financial statements. However, the CFO owns the process and would be the party responsible for communicating the issue, outlining the path forward and filing amended documents.

FEI Daily: What are your predictions for SPAC activity and risks to the industry if restatements continue to rise?

Frangiskatos: Though the SEC guidance certainly had an impact on the slowdown, I think the space was potentially already peaking around April 2021– nothing can run that hot forever. However, I think we are already seeing an uptick after the abrupt slowdown in April – while nowhere near peak levels, activity picked up again in June and is on track to continue doing so in July.

Moving forward, I think preparation will be more important than ever – with the knowledge that the SEC has an eye on this space, those choosing to go the SPAC route will need to be sure their financial statements are rock solid.