NEW YORK / WASHINGTON (Reuters) – The US securities regulator has opened an investigation into the Wall Street madness to acquire blank checks and is seeking information on how insurers manage risk, said four people with direct knowledge of the case.
The U.S. Securities and Exchange Commission (SEC) has been sending letters to Wall Street banks in recent days asking for information about the transactions of their special acquisition firm or SPAC, the four people said.
SPACs are publicly traded shell companies that raise funds to acquire a private company with the intent of making it public, allowing such targets to bypass a traditional IPO.
The SEC letters asked the banks to voluntarily provide the information and as such did not reach the level of a formal investigation request, two of the sources said.
However, one of those two people said letters had been sent by the SEC’s enforcement department, suggesting they could be a precursor to a formal investigation.
This person said the SEC wanted information on the transaction costs, volumes, and controls banks have to monitor the deals internally. The second source above said the SEC raised questions related to compliance, reporting and internal controls.
SEC representatives did not immediately respond to requests for comment outside of US business hours.
Wall Street’s biggest gold rush in recent years, SPACs have soared worldwide this year to a record $ 170 billion, more than last year’s total of $ 157 billion, Refinitiv data showed.
The boom was fueled in part by easy monetary conditions as central banks have pumped money into pandemic economies, while the SPAC structure provides startups with an easier way to go public with less regulatory oversight than the traditional IPO route. But the frenzy is met with greater skepticism among investors and is also drawing the attention of regulators.
This month, the SEC warned investors not to buy into SPACs based on celebrity approvals, saying it was closely monitoring SPAC disclosures and other “structural” SPAC issues.
According to data from Stanford University, investors have sued eight companies that combined with SPACs in the first quarter of 2021. Some lawsuits allege that the SPACs and their sponsors, reaping huge profits once an SPAC unites with its target, hid weaknesses before the trades.
The SEC may be concerned about the depth of due diligence SPACs conduct before acquiring assets, and whether massive payouts are fully disclosed to investors, a third source said.
Another potential concern is the increased risk of insider trading between when an SPAC goes public and when it announces its acquisition target, the second source added.
“Wall Street’s biggest banks are being 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