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The Securities and Exchange Commission will require blank check companies known as SPACs to restate their financial results because they improperly followed accounting rules on how to classify certain stocks they offer to investors, according to the auditors and advisers of these companies.

The errors mark the latest regulatory intervention that could affect hundreds of special purpose acquisition companies, which are formed solely to buy other companies and take them public. SPACs have grown in popularity in 2020, but regulators have pledged to monitor them more closely.

The issue has been bubbling for months, but most auditing firms considered the errors to be small enough that they could be corrected with a revision, a minor correction that is disclosed in the next period’s financial statements. The SEC, however, told companies last week that such a correction was not enough, said David Bukzin, vice president of Marcum LLP, the firm that has audited the most SPAC IPOs in 2021 according to SPAC Research.

Instead, SPACs should draw attention to the past error with a so-called “big R” restatement — a more serious type of correction that requires a company to file a Form 8K stating that past financial statements cannot be relied upon. Errors could temporarily halt the market as SPACs process a backlog of documents.

“It’s a pervasive problem; everyone is dealing with it because everyone else has done it wrong,” said Scott Norris, Principal at UHY LLP.

The SEC did not comment on a question about how the agency told SPACs how to correct their accounting errors. According to US accounting rules described in ASC 250, if a company’s financial statements contain a material error, the company must determine whether to restate them.

The stock misclassifications mark the second time this year an accounting snafus has thwarted special purpose acquisition companies. In April, SEC staff threw sand in the gears of the booming market when they warned that SPACs were not properly accounting for investor incentives called warrants. Hundreds of restatements followed.

SPACs typically issue two types of shares: Founder Shares and Class A Shares. Class A shares are redeemable, meaning investors can ask for a refund if they don’t like a company they SPAC aims to make public. This feature is a key part of what makes SPACs attractive to early investors: if they’re unhappy with the merger, they don’t lose their money.

The new accounting problem is that for years, SPACs incorrectly treated Class A shares as permanent equity instead of temporary equity, auditors said.

“A lot of auditing firms felt that was a little R,” Bukzin said, referring to a review. “But the SEC came back and made it clear they thought it was a big R.”

According to Marcum, the SEC will not require SPACs to amend their old 10Qs, as is the case with typical “Big R” restatements. Instead, SPACs can provide details about the corrections in their next filing, Bukzin said, the SEC told his company. It is unclear how the regulator will require corrections for past annual financial statements.

At least two SPACs have already issued Big R.D and Z Media Acquisition Corp restatements. Friday night and Mercury Ecommerce Acquisition Corp. on November 4 filed 8Ks calling attention to their accounting errors.

The latest accounting errors do not affect the cash flow or the economy of a SPAC. Compared to the warrant classification issue that halted the SPAC IPO market this spring, the stock classification issue is unlikely to cause as much disruption, Bukzin said.

“This places onerous additional demands on SPAC teams on a tight schedule to meet their filing obligations,” he said.

Indeed, most SPACs must retain tangible assets of a certain amount to complete a business combination. If their permanent equity falls, this can block a deal.

ASC 480 accounting rules state that if an equity instrument is callable and that callable feature is beyond the company’s control, that instrument cannot be considered permanent, said Graham Dyer, partner at Grant Thornton LLP. .

“Clients we audited, we said every Class A share should be temporary capital,” Dyer said. Grant Thornton audited 11 SPAC IPOs in 2021, less than 2% of all SPACs, according to SPAC Research.