NEW YORK / WASHINGTON, March 24 (Reuters) – The U.S. securities regulator has launched an investigation into the Wall Street blank check frenzy and is seeking information on how underwriters are managing the risks involved. said four people with direct knowledge of the matter.
In recent days, the U.S. Securities and Exchange Commission (SEC) sent letters to Wall Street banks seeking information on the transactions of its special purpose acquisition company, or SPAC, the four people said.
SPACs are publicly traded shell companies that raise funds to acquire a private company for the purpose of going public, allowing such targets to bypass a traditional initial public offering.
The SEC’s letters asked the banks to provide the information voluntarily and as such fell short of the level of a formal investigative lawsuit, two of the sources said.
However, one of those two people said the letters were sent by the SEC’s compliance division, suggesting they may be a precursor to a formal investigation.
This person said the SEC wanted information on the rates of the SPAC deals, the volumes and the controls that banks have to monitor the deals internally. The second named source said the SEC asked questions related to compliance, reporting and internal controls.
Representatives for the SEC did not immediately respond to requests for comment outside of U.S. business hours.
The biggest Wall Street gold rush in recent years, SPACs have risen globally to a record $ 170 billion this year, topping last year’s total of $ 157 billion, Refinitiv data showed.
The boom has been driven in part by favorable monetary conditions, as central banks have injected cash into pandemic-affected economies, while the SPAC structure provides startups an easier path to go public with less. regulatory scrutiny than the traditional IPO route. But the frenzy has started to find greater skepticism from investors and has also drawn the attention of regulators.
This month, the SEC warned investors against buying SPAC based on celebrity endorsements and said it was closely watching SPAC disclosures and other “structural” SPAC issues.
Investors have sued eight companies that merged with SPAC in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits allege that the SPACs and their sponsors, who get huge pay days once a SPAC is matched with their target, concealed weaknesses before the transactions.
The SEC may be concerned about the depth of due diligence SPACs perform before acquiring assets, and whether large payments are fully disclosed to investors, a third source said.
Another possible concern is the increased risk of insider trading between the time a SPAC goes public and the time it announces its acquisition target, the second source added.
“The biggest banks on Wall Street are asked: what’s going on?” the person said. (Reporting by Jody Godoy in New York and Chris Prentice in Washington; Edited by Michelle Price and Christopher Cushing)