Having dropped their first major warning that something was coming last week with a subtle tweet suggesting “it is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it,” The Securities and Exchange Commission (SEC) just turned up the SPAC bubble-busting amplifier to ’11’ by signaling changes for how accounting rules apply to a key element of blank-check companies.

That was followed the tsunami of newly launched SPACs suddenly and dramatically hitting a brick wall. As we noted here, just three SPACs listed last week (including 2 on Wednesday), compared to more than 20 deals per week on average for most of the year.

Tonight we found out why as Bloomberg reports, citing people familiar with the matter, that The SEC last week began privately telling accountants that warrants, which are issued to early investors in the deals, might not be considered equity instruments. Bloomberg explains:

In a SPAC, early investors buy units, which typically includes a share of common stock and a fraction of a warrant to purchase more stock at a later date. They’re considered a sweetener for backers and have thus far been considered equity instruments for accounting purposes.

The proposed changes could result in warrants being considered a liability for accounting purposes, according to the Marcum note. The shift would spell a massive nuisance for accountants and lawyers, who are hired to ensured SPACs are in compliance with the agency.

Shortly after the Bloomberg story dropped, exposing the ‘private’ conversations, the SEC was forced to come clean and releases a press release detailing the accounting changes. For those so inclined, the full briefing is here, but this was a section we found notable…

We recently evaluated a fact pattern involving warrants issued by a SPAC. The terms of those warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the warrants would be entitled to receive cash for their warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.

Simply put, as Bloomberg notes, the communications mean that filings for new SPACs may not go forward until the warrants issue is addressed.

Perhaps worst still, SPACs that are already public and that have struck mergers with targets may have to restate their financial results.

And the ‘fervor’ behind the SPAC bubble is bursting…

Which leaves Chamath Palihapitiya looking for the next asset bubble to be ‘early’ in.