The New York Stock Exchange (NYSE) is located in the Financial District of Manhattan on January 28, 2021 in New York City.
Spencer Platt | Getty Images
Four people with direct knowledge of the matter said the US Securities Regulatory Authority has opened an investigation into the acquisition frenzy of blank checks on Wall Street and is seeking information on how insurers manage the risks involved.
The four people said that the US Securities and Exchange Commission (SEC) in recent days has sent letters to Wall Street banks requesting information on the dealings of the Special Purpose Acquisition Company, or SPAC,.
SPACs are listed shell companies that raise money to acquire a private company with the intent to go public, allowing such goals to avoid the traditional initial public offering.
Two sources said that the SEC’s letters asked banks to provide the information voluntarily, and thus did not live up to the official investigation request.
However, one of those people said that the letters were sent by the enforcement department of the SEC, indicating that they may have been submitted for a formal investigation.
This person said the SEC requested information on fees and volumes for SPAC deals and what controls banks have to monitor deals internally. The second source above said that the Securities and Exchange Commission had raised questions regarding compliance, reporting, and internal oversight.
SEC representatives did not immediately respond to requests for comment outside of US business hours.
Refinitiv data showed that the biggest gold rush on Wall Street in recent years jumped globally to a record $ 170 billion this year, surpassing last year’s total of $ 157 billion.
The recovery was driven in part by soft monetary conditions as central banks inject liquidity into economies hit by the pandemic, while the SPAC structure provides startups with an easier IPO pathway with less regulatory scrutiny than the traditional IPO path. But the frenzy was starting to attract greater suspicion from investors, and it also caught the attention of regulators.
This month, the SEC warned investors not to buy into SPACs based on celebrity endorsements and said it is closely monitoring SPAC disclosures and other “structural” issues of the SPAC.
Investors filed a lawsuit against eight companies that joined forces with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some lawsuits allege that the SPACs and their sponsors, who reap huge pay days once the SPAC combines with its goal, are concealing pre-transaction vulnerabilities.
A third source said the SEC may be concerned about the depth of due diligence that SPAC undertakes prior to acquiring assets, and whether massive payments are fully disclosed to investors.
The second source added that another potential concern is the increased risk of insider trading between the time SPAC becomes public and when it announces the acquisition target.
“The largest Wall Street bank is being asked: What is going on?” The person said.