NEW YORK / WASHINGTON, March 24 (Reuters) – The US securities regulator has opened an investigation into the Wall Street blank check acquisition frenzy and is seeking information on how underwriters are managing the risks involved, said four people with direct knowledge of the subject.
The United States Securities and Exchange Commission (SEC) in the past few days has sent letters to Wall Street banks seeking information about the business of its special-purpose acquisition company, or SPAC, the four people said.
SPACs are listed front companies that raise funds to acquire a private company with the aim of making it public, allowing such targets to bypass a traditional initial public offering.
SEC letters asked banks to provide the information voluntarily and, as such, did not reach the level of a formal investigation demand, two of the sources said.
However, one of these two people said that letters were sent by the SEC’s oversight division, suggesting that they may be the precursor to a formal investigation.
That person said the SEC wanted information about SPAC’s business rates, volumes and what controls banks have to police business internally. The second source above said that the SEC asked questions related to compliance, reporting and internal controls.
SEC representatives did not immediately respond to requests for comment outside of US business hours.
The biggest Wall Street gold rush in recent years, SPACs have risen globally to a record $ 170 billion this year, beating last year’s total of $ 157 billion, Refinitiv data showed.
The boom was fueled in part by easy monetary conditions, as central banks injected money into the economies hit by the pandemic, while the SPAC structure provides startups with an easier way to go public with less regulatory scrutiny than the traditional route. of IPO. But the frenzy began to find greater skepticism from investors and also caught the attention of regulators.
This month, the SEC warned investors against buying SPACs based on celebrity endorsement and said it was closely watching SPAC disclosures and other “structural” SPAC issues.
Investors sued eight companies that combined with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits claim that SPACs and their sponsors, who obtain large payments, once a SPAC matches its target, hid weaknesses before transactions.
The SEC may be concerned about the depth of due diligence that SPACs perform before acquiring assets, and whether the huge payments are fully disclosed to investors, a third source said.
Another potential concern is the high risk of insider trading between the moment a SPAC goes public and the moment it announces its acquisition objective, the second source added.
“The biggest banks on Wall Street are being asked: what is going on?” said the person. (Reporting by Jody Godoy in New York and Chris Prentice in Washington; Edited by Michelle Price and Christopher Cushing)