The U.S. Securities and Exchange Commission (SEC) is probing Wall Street’s special purpose acquisition company (SPAC) frenzy.
Specifically, regulators are seeking information on how underwriters are managing the risks involved with SPAC deals, sending letters to Wall Street banks seeking information on their SPAC dealings.
SPACs are listed shell companies that raise funds to acquire a private company with the purpose of taking it public, allowing such targets to sidestep a traditional initial public offering (IPO). The SEC letters have asked the banks to provide the information voluntarily and, as such, does not rise to the level of a formal investigation.
However, the letters were sent by the SEC’s enforcement division, suggesting they may be a precursor to a more formal investigation.
SPAC deals have surged globally to a record $170 billion this year, outstripping last year’s total of $157 billion, according to data from Refinitiv.
The boom has been fueled in part by easy monetary conditions as central banks have pumped cash into pandemic-hit economies, while the SPAC structure provides start-ups with an easier path to go public with less regulatory scrutiny than traditional IPOs.
But the frenzy has started to meet with greater investor skepticism and has also caught the eye of regulators. Earlier in March, the SEC warned investors against buying into SPACs based on celebrity endorsements and said it was closely watching SPAC disclosures.
A growing number of investors have sued companies that combined with SPACs, alleging the SPACs and their sponsors hid financial weakness ahead of the transactions. There are other concerns of a heightened risk of insider trading between when a SPAC goes public and when it announces its acquisition target.
