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Last month, the SEC threw a monkey wrench into the SPAC market when the Corp Fin Director & the Chief Accountant issued a joint statement on accounting for SPAC warrants.  To make a long story short, the Staff’s position is that a lot of SPACs may have been incorrectly classifying certain warrants as equity instead of as a liability.  As Lynn suggested it might when she blogged about the joint statement last month, the Staff’s position has led to a wave of restatements.

But a wave of restatements might not even have been the biggest problem arising out of this guidance for SPACs.  That’s because SPAC IPOs have essentially come to a halt due to uncertainties about what tweaks to warrant terms would satisfy the SEC.  Now, according to this CFO Dive article, a fix may be in the works:

A form of warrant that isn’t accounted for as a liability for special purpose acquisition companies (SPACs) is under development, but until that process is completed and gets an okay by the Securities and Exchange Commission, sponsors and others with an interest in the market face uncertain terrain, Gerry Spedale said in a Gibson, Dunn Crutcher webcast last week.

“You have accounting firms and law firms working together on that form, and that needs to get blessed by the SEC before everyone’s going to be comfortable moving forward with that approach,” said Spedale, a Gibson, Dunn & Crutcher partner.

The article says that this process is going to take several weeks, which means the SPAC IPO market is going to continue to face significant uncertainty for a while longer. Then again, maybe that’s not such a bad thing.

SEC Enforcement: “Known Trends” Continues to Trend

Earlier this month, the SEC announced a settled enforcement proceeding against Under Armour arising out of allegedly misleading disclosures concerning the reasons for revenue growth and failing to disclose known uncertainties about future revenue growth. This Locke Lord blog points out that efforts to manage earnings to meet analyst expectations may have consequences for MD&A disclosure even if they don’t involve improper accounting:

According to the SEC order, Under Armour, in order to meet analyst projections and sustain its 20% quarter over quarter revenue growth record, pressured customers to move purchases forward into the current quarter, and did this for a number of consecutive quarters. There was no finding that Under Armour’s accounting for these sales as revenues was improper since the sales were actually made.

However, Under Armour gave the same reasons for revenue growth as it had before in earnings releases and its MD&A, without indicating that it was pulling revenues forward to maintain its growth and that this was an unsustainable practice, especially since doing so made it harder to sustain the rate of growth as a result of increasing the prior year’s base and taking revenues from the later year.

Without admitting or denying the findings in the SEC’s order, Under Armour agreed to cease and desist from violations of Section 17(a) of the Securities Act and certain reporting provisions of the securities laws, and to pay a $9 million penalty.

It’s worth noting that this is the third “known trends” enforcement proceeding against a high-profile public company that the SEC has brought since the beginning of 2020. Diageo PLC settled similar charges in February 2020, and HP did the same last September.  All of these proceedings involved MD&A disclosure shortcomings concerning the future implications of actions taken to enable companies to meet current period earnings estimates.

In Memoriam: Jason Morse

This has been a difficult week for all of us at CCRcorp. On Monday, May 17th, our friend and colleague Jason Morse passed away unexpectedly. Jason had been an Account Executive with our company for more than two years, and our office will be closed today in honor of his memory. On behalf of everyone at CCRcorp, I want to offer our sincere condolences to Jason’s family and friends, and in particular to his sons, of whom he was so proud.

Over the past several days, many colleagues have shared remembrances of Jason on our Intranet page. As I read them, I was struck by the repeated references to his kindness, generosity, and good cheer. One colleague remembered Jason as “the person who without fail would always wish me a “Good Morning!” with a big smile on his face, as soon as I walked into the office.” Several others mentioned how Jason made them feel so welcome when they first joined the company. Another told the story of how Jason gave away his own lunch to a colleague who had forgotten to bring his from home.

Many years ago, I read William Wordsworth’s poem “Tintern Abbey.”  At one point in the poem, Wordsworth speaks of “that best portion of a good man’s life / His little, nameless, unremembered, acts / Of kindness and of love.” Those words resonated with me, and I found comfort in reflecting upon them when my own father passed away. Reading what my colleagues had to say about Jason brought those words to mind again. I hope they will serve as a source of comfort to his family and friends as they remember the life of this good man. May he rest in peace.

– John Jenkins