Special purpose acquisition companies (SPACs) may soon be subject to a 1 percent excise tax, which may affect how they are treated when it comes to an initial public offering (IPO), Accounting Today reported.
A SPAC is defined by the Securities and Exchange Commission (SEC) as “typically a shell company that is organized for the purpose of merging with or acquiring one or more unidentified private operating companies (a “de-SPAC transaction”) within a certain time frame (often two years) and that conducts a firm commitment underwritten initial public offering of $5 million or more in units consisting of redeemable shares and warrants.” SPACs are also known as “blank check companies," according to Investopedia.
A new rule and amendments proposed by the SEC would enhance the disclosures and investor protection in IPOs by SPACs by requiring more disclosures about SPAC sponsors, conflicts of interest, and business combination transactions between SPACs and private operating companies, among other things.
The 1 percent excise tax is imposed on the repurchase of corporate stock by publicly traded companies after Dec. 31, 2022. Its application to a SPAC depends on several factors, one expert told Accounting Today.
“There is a very high level of uncertainty as to how this excise tax is going to be applied to SPAC redemptions," said Melanie Chen, who leads the China Group at UHY Advisors in New York. "It's not clear whether SPACs will be treated as an investment company. In the Inflation Reduction Act, there are specific exemptions for the investment companies. The SEC proposed rules to subject SPACs to investment company requirements. ... The question is the level of the impact, and that's the biggest uncertainty.”
SPAC activity declined in the third quarter of the year. Only eight new IPOs raised a total of $678 million, a 91 decrease from the third quarter of 2021, according to SPACinsider.
That decline was blamed partly on an April 2021 SEC accounting guidance on SPACs. Other factors included the underperformance of some SPACs that went public, overall market conditions, high inflation and increased interest rates.
More SPACs are expected to liquidate before the end of the year to enable investors to avoid the new excise tax, Chen said.