Regulators Step Up Scrutiny of SPACs With New View on Warrants

SPACs are blank-check companies that raise money from the public with a goal of buying a business and taking it public. If the deal happens, the target company takes the SPAC’s place on a stock exchange, in a transaction that resembles an initial public offering. SPACs have boomed over the past year as many deal makers rushed to start them and take advantage of investors’ thirst for the structure.

SPACs have typically classified the warrants on their balance sheets as equity. Under certain circumstances, they should be classified as liabilities, which would require the company to periodically account for changes in the warrants’ value, the Securities and Exchange Commission said in a statement released late Monday. One impact of the SEC’s announcement: SPACs that are affected would have to restate their financial results if the fluctuations are deemed to be material, the SEC said.

The Wall Street watchdog has started examining the market more closely as SPACs proliferated this year, raising nearly $100 billion. A senior SEC official said last week that SPACs might not have any regulatory advantages over the standard public offering, signaling the agency would scrutinize the failings the same way they do IPOs.

The SEC didn’t say in its statement how it had come to review the accounting treatment for warrants, which have been a part of SPACs for decades. A person familiar with the matter said the agency received questions from one SPAC about how generally accepted accounting principles require valuing the warrants, and regulators dug in from there. SPACs’ financial statements have typically been audited by smaller accounting firms, and not the Big Four firms that review the books of most large public companies.

The SEC didn’t say on Monday how many SPACs would be affected by its view on the warrants. But it suggested that more than a handful will have to reckon with its statement.

Not all SPACs will be affected, but many will, the SEC suggested in its statement. “While the specific terms of such warrants can vary, we understand that certain features of warrants issued in SPAC transactions may be common across many entities,” the SEC’s acting director of corporation finance and acting chief accountant wrote.

Those features include warrants that can be settled differently for some holders, such as warrants that can be exchanged for cash rather than shares. They also include warrants with a payoff that varies depending on who the holder is—such as giving a richer return to the SPAC’s founders or early investors than to public shareholders.

Write to Dave Michaels at dave.michaels@wsj.com