The New York Stock Exchange (NYSE) stands in the financial district of Manhattan in New York City on January 28, 2021.
Spencer Platt | Getty Images
The U.S. Securities and Exchange Commission has opened an investigation into the madness of the acquisition of blank checks on Wall Street and is seeking information on how insurers are handling the risks involved, said four people with direct knowledge of the matter.
The US Securities and Exchange Commission (SEC) has sent letters to Wall Street banks in the past few days for information about the operations of their special purpose vehicle (SPAC).
SPACs are publicly traded Shell companies that raise funds to acquire a private company in order to bring it public so that such goals can bypass a traditional IPO.
The SEC’s letters asked banks to provide the information voluntarily, and as such, they did not reach the level of a formal investigation request, two of the sources said.
However, one of these two people said that letters were sent from the SEC’s enforcement department, suggesting that they may be a precursor to a formal investigation.
That person said the SEC wanted information on SPAC deal fees, volumes, and what controls banks have put in place to internally monitor deals. The second source mentioned above said the SEC had raised questions about compliance, reporting and internal controls.
SEC officials did not immediately respond to requests for comment outside of US business hours.
SPACs, Wall Street’s biggest gold rush in recent years, soared to a record $ 170 billion worldwide this year, beating last year’s $ 157 billion, according to Refinitiv data.
The boom was fueled in part by favorable monetary conditions as central banks pumped cash into pandemic-hit economies, while the SPAC structure provides startups with an easier way to go public with less regulatory scrutiny than the traditional IPO -Path. But the frenzy has met with greater skepticism from investors and has also caught the attention of regulators.
This month, the SEC warned investors not to buy SPACs based on celebrities, saying it was closely monitoring the SPAC disclosures and other “structural” SPAC issues.
According to Stanford University, investors sued eight companies that partnered with SPACs in the first quarter of 2021. Some of the lawsuits claim that the SPACs and their sponsors, who bring in huge paydays once a SPAC connects to its target, have hidden weaknesses from the transactions.
The SEC may be concerned about the depth of due diligence SPACs perform prior to acquiring assets and whether it will fully disclose huge payouts to investors, a third source said.
Another potential problem is the increased risk of insider trading between a SPAC going public and the announcement of its acquisition target, the second source added.
“Wall Street’s Biggest Banks Are Asked: What’s Up?” said the person.