Private Equity

In April 2021, the SEC staff issued a statement concerning accounting and reporting considerations with respect to warrants issued by SPACs in connection with their IPOs. Specifically, the SEC staff stated that SPACs may not be properly accounting for such warrants, which are often treated as equity rather than as liabilities in SPAC financial statements. As a result, a number of SPACs and de-SPAC companies are reassessing their accounting treatment and financial reporting with respect to outstanding SPAC warrants, which, in some instances, has resulted in (or may result in) a restatement of financial statements.

On Friday, May 28, 2021, a first-of-its-kind putative securities class action complaint was filed against Virgin Galactic Holdings and certain of its current and former officers in the United States District Court for the Eastern District of New York relating to Virgin Galactic’s accounting treatment of SPAC warrants. Virgin Galactic went public in 2019 through a de-SPAC transaction with Social Capital Hedsophia Holdings Corp. (“SCH”). On April 30, 2021, Virgin Galactic announced that it would delay its financial reporting for the first quarter of 2021 in light of the SEC staff statement concerning the accounting treatment of SPAC warrants and that it would “restate its consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020” “due solely to the accounting treatment for the warrants of [SCH] that were outstanding at the time of the Company’s business combination on October 25, 2019.” Virgin Galactic’s stock price subsequently declined by over 9%, allegedly on that news. The recently-filed complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making “materially false and misleading statements regarding the Company’s business, operations, and compliance policies,” including with respect to, among other things, the accounting treatment of SPAC warrants and the company’s internal controls over financial reporting.

While it is early days for the Virgin Galactic securities action and the defendants are likely to raise a number of defenses (including, among other things, failure to plead that any defendant acted with scienter in accounting for SPAC warrants as equity rather than as labilities), SPAC directors and officers should be aware of the emerging litigation risk in light of the SEC staff statement concerning SPAC warrant accounting and any restatement of a SPAC’s (or de-SPAC company’s) financial statements.

For your convenience, a PDF version of this alert is available here.