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SEC Accepts Loeb’s Position on the Applicability of EITF 00-19 to SPAC Warrants

Crediting a memorandum of law prepared by Loeb & Loeb LLP, the Securities and Exchange Commission accepted Loeb & Loeb’s position that EITF Issue No. 00-19 does not require the issuer, in this case Stone Arcade Acquisition Corp., to maintain on its balance sheet a contingent liability equal to the difference between the exercise price and the current market price of the warrants issued in its IPO.

EITF 00-19 recently became a thorny issue for the numerous special purpose acquisition companies that have completed public offerings during the last several years. In reviewing the newer SPAC IPO filings, as well as the proxy statements filed during the last several months by earlier SPACs seeking approval of their business combinations, the SEC’s accounting staff began issuing the comment that the language of EITF 00-19 required issuers to comply with the financial reporting requirements of the pronouncement by reflecting a contingent liability on their balance sheet.

The SEC cited the presumptive language contained in the accounting pronouncement, which in essence states that unless the warrant agreement specifically states the contrary, a holder of a warrant is entitled to a “net cash settlement” in the event the issuer is unable to deliver registered shares upon the exercise of the warrants. A number of SPACs subsequently restated their financial statements in response to this comment. The SEC recently accepted the position outlined in Loeb’s memo that, as a matter of contract law, (1) Stone’s warrant agreement (which contains a provision obligating the company to use only its “best efforts” to maintain an effective registration statement covering the underlying shares) cannot properly be interpreted as granting the holders any right to a net cash settlement; (2) that an addendum to the warrant agreement undertaken to clarify this point solely for accounting purposes is proper and permissible under the terms of the original agreement; and (3) that in lieu of the foregoing, a contingent liability need not be reflected on Stone’s balance sheet.

Stone Arcade has filed a definitive proxy statement with the SEC in connection with its proposed acquisition of the Krafts Paper Division of International Paper Company. Morgan Joseph acted as lead underwriter of Stone’s IPO.

This client alert is a publication of Loeb & Loeb and is intended to provide information on recent legal developments. This client alert does not create or continue an attorney client relationship nor should it be construed as legal advice or an opinion on specific situations.

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