Why SPAC IPOs Have Plummeted in April

The first three months of 2021 accelerated the boom in special purpose acquisition company (SPAC) issues to record highs. Following a banner year in 2020, the number of SPACs that had initial public offerings (IPOs) soared in the first quarter of 2021.

Here’s how many SPACs went public over the past two quarters, broken down by month.

MonthNumber of SPAC IPOs
October 202033
November 202020
December 202037
January 202186
February 202197
March 2021109
Data source: SPAC Research via CNBC

However, the number of SPAC IPOs has dropped in April, with just 10 offerings this month so far. Here’s why.

What’s changed for SPACs over the past month

Although some SPACs started to pull back in February as investors sold their speculative growth stocks to instead invest in value stocks that could benefit from economic reopenings, the number of SPAC new issues continued to march higher despite rising concerns around valuations and talk of a SPAC bubble.

A few things have happened over the past month. For starters, the sheer number of SPACs filing to go public has led to a massive backlog in the amount of paperwork that lawyers, investment bankers, and auditors have to process, according to a Bloomberg report in late March. That has created an administrative bottleneck, lengthening the amount of time it takes for a SPAC to go public.

Secondly and perhaps more importantly, the SEC released a public statement in early April warning SPACs that outstanding warrants may need to be reclassified for accounting purposes. Instead of being considered equity, warrants may need to be considered liabilities measured at fair value, with changes in fair value being reported on the income statement. The notice has created considerable uncertainty in the SPAC market because the guidance has not yet been finalized.

What the potential new guidance on SPAC warrants could mean

Many SPACs may need to go back and re-do financial statements that had previously been filed, creating yet another headache for the same bankers, lawyers, and auditors who are already overwhelmed. Additionally, a lot of SPACs consist of relatively small teams that may not be prepared for the sophisticated process of tracking and accounting for market fluctuations in warrants.

The new scrutiny has shaken investor confidence in SPACs when many were already declining in the recent volatility.

Why warrants are a big deal for SPACs

Warrants are a mainstay of SPAC deals. Typically, a SPAC goes public with units that include common stock and fractional warrants that are thrown in as a bonus for institutional investors that participate in the IPO. Shortly after the IPO, the units can be split into shares and warrants that trade separately. Whole warrants will then usually allow investors to buy the stock at a strike price of $11.50 and become exercisable at a later date.

Outlook on SPACs 

Some SPACs are already starting to give investors an idea of the potential impact of the proposed changes. Northern Genesis Acquisition (NYSE: NGA), which is merging with Canadian commercial electric vehicle maker Lion Electric, filed an 8-K with the SEC this week breaking down how historical statements would need to be restated, demonstrating that the change may not be as intimidating as feared.

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