Social Capital Hedosophia Holdings V (NYSE:IPOE) resubmitted its S-4 merger document with the Securities and Exchange Commission (SEC) on April 23. Most importantly, for holders of IPOE stock, it looks as though the vote to merge with California fintech SoFi ought to be a go soon.
The SEC recently stated that special purpose acquisition company (SPAC) warrants should be treated as liabilities and not equity on their balance sheets. If passed into law, SPACs would need to redo their financials.
As Social Capital Hedosophia tweeted on April 22, it was ahead of the curve, refiling an amended S-4.
What does it mean for IPOE stock? I’ll have a quick look.
The Balance Sheet Looks a Little Different
If you look at its balance sheet on page F-3 of the refiled S-4, you will see a line in current liabilities entitled “Warrant Liabilities” and a value of $99.3 million. That’s 78% of its total liabilities.
If you go to amendment No. 3 of its S-4 filed on March 31, you will see that the total assets of $806.1 million are the same in both instances. However, you will also see that its total liabilities were only $28.4 million. The extra $99 million and change was part of the $772.7 million in commitments under shareholders’ equity.
In the refiling, the commitments under shareholders’ equity dropped to $673.4 million and the warrant liabilities line item was added, making up for the difference in equity.
There are concerns that because most SPACs are audited by just two firms (WithumSmith + Brown and Marcum LLP) restatements of financials will take longer than they should, possibly damaging the reputation of SPACs.
Personally, I don’t see it.
The most important line on the balance sheet for investors is “Marketable securities held in Trust Account.” That hasn’t changed. In both instances, it is $805.2 million.
If a combination never happened and IPOE had to liquidate its trust account and return funds to shareholders, that line remains the most important. The warrant liabilities, as stated on page F-20 of the refiling, “are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the change in fair value of warrant liabilities in the Consolidated Statement of Operations.”
In some respects, it is similar to the changes that occurred a few years ago with mark-to-market accounting. Based on the new rules, Warren Buffett advised Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) shareholders to focus on operating earnings because its reported earnings would rise and fall in future quarters based on the value of its massive equity portfolio.
It Shouldn’t Hurt IPOE Stock in the Long Run
CFO Dive recently examined the accounting change put into place for SPACs that classifies warrants as liabilities rather than equity. Investment banker Harris Antoniades, the managing director of Stout, a Chicago-based investment bank, believes that the complex modeling required to value the warrants makes the change an expensive one for SPAC sponsors both in terms of time and money.
If it’s a plain vanilla warrant, it’s a very easy calculation. You can use a Black-Scholes calculation — also known as a closed-form solution. ‘You’re using the share price, the strike price, the volatility of the common share, and the term of the warrant. It’s a very simple calculation.
However, most SPACs have an automatic redemption, which requires a complex model. IPOE’s prospectus spends paragraphs discussing the redemption of warrants. Those three words are found 37 times in the October 2020 prospectus.
Clearly, the fact that Social Capital Hedosophia and SoFi were so quick to restate IPOE’s financials suggests the powers that be don’t see a problem with the change.
SPACs historically haven’t been held to a higher standard. The SECs latest move is a way for it to exert pressure on these blank-check offerings without having to clamp down more substantially.
At the end of the day, SoFi and Social Capital Hedosophia, to use a football analogy, are in the red zone and ready to score. To hold up its merger because of a change in the accounting seems silly given the merge will create a business with an equity value of $14.4 billion based on 865.1 million shares outstanding post-merger.
The Bottom Line
While it’s likely the SEC will continue to tweak the SPAC rules to ensure investors aren’t getting taken to the cleaners by SPAC sponsors, SoFi and Social Capital Hedosophia need not be concerned about this.
At the end of the day, SoFi is likely to go public, which means, at least for owners of IPOE stock, the accounting change is much ado about nothing.
As for SPACs that haven’t gone public yet, they’ll either have to accept greater scrutiny from the SEC, or they can forget about listing on a U.S. stock exchange. It’s that simple.
The legitimate SPACs won’t have an issue with a higher standard. I guarantee it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.