Creation of liquidity events through IPOs and PSPCs
Eric Gomberg, investment banker of Odeon Capital, says PSPCs have become increasingly popular due to forward projections. There were record highs in the first quarter – nearly 300 IPOs, which is more than the 248 done all last year, which was actually twice the total of all PSPCs in the previous decade. But recent SEC comments may put a damper on that activity.
The SEC said these warrants should be treated as a liability and not as equity, which it said on a cash basis makes no difference. But, from an accounting standpoint, it has caused confusion as to how it should be treated and could be a temporary hurdle for the market.
A SPAC is made public through a traditional IPO, but when it merges it has an S4, a merger document, not an S1, an IPO document, this which allows projections.
“In a zero or near zero interest rate environment where you update the numbers for 2024 and 2028 and you are allowed to project into infinity if you want, where you update those numbers and they become rates much more interesting zero percent interest, that’s pretty interesting, âhe says.
Recently, many pre-income or for-profit businesses, when exploring what their distant future would look like, anything in a world with zero percent interest rates has allowed some businesses to make a profit. significant success. There is a market appetite for these big stories, like Tesla, that unfold in years and not just months.
But the SEC recently commented on the accounting for warrants. Traditionally, in the more than 20 year history of SPAC, the investor puts dollars into a unit and the unit comes with a share. The share is made up of dollars that go into a trust account, which essentially makes it a risk-free cash alternative. This is in part what made the SAVS very convincing. And the term or a half term or a quarter term, which is freely negotiable, adds juice to the IPO.
The SEC, however, commented that these warrants should be treated as a liability and not as equity, which it said on a cash basis makes no difference, but from an accounting standpoint has caused confusion on how it should be treated – using a Monte Simulation from Carlo, Black-Scholes.
âWhat is the appropriate accounting treatment that the SEC will agree to and how will the market react? ” he says.
From a capital markets perspective, Gomberg says it sounds a lot like a currency swap or an interest rate swap where it could dramatically increase GAAP earnings quarter over quarter.
âAnd most investors would look at that – it’s a derivative liability, it’s a non-cash liability. But in the meantime, no one wants to be disadvantaged, âhe says. âNo PSPC sponsor wants to be the one with the responsibility and everyone has equity warrants. So there is really a lot of confusion as to what the resolution will be. I think it’s a temporary barrier to the market.
At the recent St. Louis Smart Business Dealmakers conference, Gomberg, with BDO USA Chief Tax Officer, Meg Kellogg and National Private Equity Practice Leader Scott Hendon, as well as Armstrong Teasdale LLP Partner John Sten, talked about creating liquidity events through IPOs. and PSPCs. Press play on the video above to watch the full panel discussion.