SEC Has Entered the Chat

Hi Everyone 👋

I’m very happy to report that I got my first shot! #TeamPfizer over here. I felt sluggish for a couple days, but feeling great now. It’s a beautiful sunny weekend and I got to play lots of tennis, so ya girl is in great spirits heading into the new week! Hope you all had a great weekend too, including all my amazing readers in Europe :)

My new SPAC Trader friend, Cassius Cuvee, is also a rapper. You may know Cuvee from his rap on SPACs a couple months ago, called SPAC Dreams. It was very good and got him featured on CNBC, WSJ, Bloomberg everywhere. One of the lyrics was…

“Now the warrants, oo-wee, you better watch yo self

If you don’t get em for the low then they might squash yo wealth”

While those lyrics were money making earlier in the year, that trade seems to have gone sideways as warrants seem to be continually depressed and especially so, since the SEC entered the chat. It started with them implementing a new accounting standard for Warrants, where the Warrants need to be treated as Liabilities and not as Equity on the balance sheet, both going forward and retroactively. This sent all the SPAC Sponsors in search of valuation firms to perform the esoteric and oh so fancy Monte Carlo simulations of their public and private warrants. But in addition to incurring a new expense on a quarterly basis, it seems to have also ignited a bigger conversation where the Sponsors are thinking if it’s a better idea to replace Warrants with Rights altogether.

The thinking is that the Rights can be listed as Equity on the balance sheet, therefore sparing the Sponsors a quarterly headache that comes with Warrants. We are starting to see some S-1’s being filed with Rights, but I don’t feel that this is a full-proof solution as there are private Warrants (the ones that go to the Sponsor) that will still be subject to the quarterly Fair Market Value analysis. So I feel the jury is still out on what’s the optimal course of action here, but all to say that this is further contributing to the slowing of issuance in the SPAC market as Sponsors seek further clarity.

One of the more unintended consequences of this is also that it further dampens the retail participation as there were many who were just trading warrants. While some were more sophisticated to do the risk less arbitrage trade of splitting units for commons and warrants, there were plenty others who were just flipping warrants. So if more and more IPOs come out with no warrants, it essentially reduces that retail demand as there would only be SPAC Common Shares on the menu vs. the entire buffet of SPAC Units, Commons and Warrants. Anyways that’s more discussion than warrants warrant 😛

Now, it would have been naive of us to think that the SEC would take it easy after re-distributing the wealth from Sponsors to Accountants, Lawyers, Valuation Firms and Auditors. There is new chatter that next up on the SEC list is that the Founder Shares should be taxed as stock based compensation and not capital gains. Apparently, the tax treatment of Founder Shares has been a longstanding point of contention and confusion between the SEC and SPACs, and they are slowly getting ready to tackle it. Sponsors often contribute cash (for example, $25,000, or approximately $0.007 per founder share) for founder shares, which would translate into 20% ownership of the SPAC after its IPO. So it would do a real number on the Sponsors and substantially reduce their economics if the SEC decides to pull the tax card.

However, between incorporating in Delaware vs Cayman Islands, PFIC status issues, filing pre-emptive Section 83(b) elections, Section 1061, founder shares being taxed upon IPO, acquisition, or eventual exit, there are a plethora of tax issues for SEC to resolve, and so far tax advisors have been very adept at figuring out all the loopholes to save Sponsors from giving up on their economics. Long story short, all this means is that solving the taxation issue isn’t as simple as issuing a warrant restatement guideline. And the imminent repercussions of this just mean a continued slowdown in the SPAC S-1 filings & IPOs.

But you still ask, why should Sponsors get into all the SEC trouble. Well, SPAC Targets are the next target of the SEC. The tweet below is a nice summary of what the SEC got cookin’ for Targets coming out with audacious projections. It seems like Elon is secretly running a school for these Target companies CEOs, giving them lessons is how to blow smoke up in the public markets. 

One of the SPAC mergers that was announced this week is a good example. $GMII announced a merger with Sonder, a company quite similar to Airbnb. The deal gives Sonder a proforma EV of $2.2B, and if you look at their 2025 revenue projections, it really feels like that the math was done backward or more like it was a math test where the teacher went, “Hey David, given the company has an EV of $2.2B, let’s see if you can solve for 2025 revenue!” And voila, he did! I kid, but adding to the insanity is the fact that it was Alec Gores’ deal, one of the OG SPAC Sponsors who has raised 13 SPACs (worth $5.7B in trust value), completed 5 mergers, and announced 2 more deals. Like c’mon Alec! It seems like the market is in similar shock as the deal failed to pop at all on announcement and the stock actually closed below NAV. 

At this point, I feel like we are all waiting for Chamath to announce a deal, in the hopes that it would reset the market and give it a much needed vote of confidence. But at the same time, I’m also a bit nervous that if he announces a deal and it fails to perform, then what….?! 

Sometimes at night, when I can’t sleep, I also wonder that when Chamath posted his topless selfie, if that was the top…