The latest check acquisition frenzy that has been captivating Wall Street finally caught the attention of the US Securities and Exchange Commission (SEC), which has opened an inquiry to determine how underwriters are bypassing the significant risks inherent in special purpose acquisition company (SPAC) dealings.
According to unnamed sources cited by Reuters, the SEC has recently sent letters to several prominent Wall Street banks regarding their interactions with SPACs. The inquiry is seeking information via voluntary means and, as such, has not yet escalated to a level that warrants a formal investigation. However, according to one of the individuals familiar with the matter, the letters were sent by the SEC’s enforcement division, suggesting that the inquiry may be a precursor for a formal investigation in the foreseeable future.
As part of the inquiry, the SEC is gathering knowledge on volumes, deal fees, and internal controls that enforce deals, as well as information on compliance and reporting. The SEC’s concerns are primary focused on the potential lack of due diligence, as well as elevated risk of insider trading prior to the SPAC’s acquisition target announcement, Reuters reported.
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SPACs have become the latest craze among Wall Street enthusiasts, and have soared globally to a record $170 billion this year, exceeding last year’s total of $157 billion. The latest boom is largely the result of relaxed economic conditions after central banks pumped unprecedented amounts of cash into the market. SPACs provide a more effortless path for startups to go public, with less regulatory scrutiny compared to traditional IPS routes.
However, US regulators have become increasingly concerned about the emerging risks that could affect investors. The SEC recently cautioned investors against purchasing stakes in SPACs based solely on the celebrity and professional athlete endorsements. “Lately, we have 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,” said SEC Acting Chair Allison Herren Lee earlier in March.
SPACs are publicly listed shell companies that lack revenue but raise funds from investors in order to acquire a private company with the purpose of taking it public.
Information for this briefing was found via Reuters and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
