Wall Street Banks Anticipate SEC Inquiries Into SPAC Market

Wall Street’s biggest banks are expecting the U.S. Securities and Exchange Commission to step up its oversight of the red-hot SPACs market.

Officials at major firms are anticipating letters from regulators asking about the potential dangers of underwriting a deluge of deals from so-called blank-check companies, according to two people familiar with the matter.

For now, the inquiry appears to be mostly fact-finding, but it could turn into something more formal depending on what regulators uncover, one of the people said, asking not to be identified because the matter is private. Reuters previously reported the SEC’s inquiries into special purpose acquisition companies.

The development follows increasing concerns -- including some raised by SEC officials -- that the SPAC frenzy has gotten out of control and will end badly for investors. While banks have been pushing SPAC deals out the door for months, one impact of the regulator’s move could be a chilling effect that prompts firms to tap the brakes.

An SEC spokesman declined to comment. Shares of blank-check companies declined, with the IPOX SPAC Index 1.1% lower at 9:40 a.m. in New York.

The explosive growth of SPACs is hard to overstate. Through the middle of this month, almost $73 billion had already been raised in 2021 from investors through 226 offerings, accounting for more than 70% of the market for initial public offerings. That compares with $83.3 billion raised from 248 SPACs in 2020 and $13.6 billion from 59 deals in 2019.

Alex Rodriguez, Shaq

Despite the recent surge, SPACs have been around for decades. They are publicly traded shell companies with no revenue that raise money from shareholders with the goal of buying a business -- meaning investors are basically betting on the ability of those who formed the SPAC to strike a lucrative deal down the line. Those who’ve started them since last year include sports figures such as Alex Rodriguez and Shaquille O’Neal and billionaire investor William Ackman.

A top worry is that as more and more SPACs sell shares, there will be few viable companies available for them to acquire, leaving investors holding the bag if SPAC share prices tank.

That’s a concern, acting SEC Chairman Allison Lee said earlier this month, saying the agency has seen “more and more evidence on the risk side of the equation for SPACs as we see studies showing that their performance for most investors doesn’t match the hype.”

The SEC has also warned against buying stakes in SPACs based solely on endorsements from celebrities. The regulator didn’t single anyone out specifically.

©2021 Bloomberg L.P.

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