In recent days, the agency had sent letters to banks regarding their work with special purpose acquisition companies, or Spacs, according to two sources familiar with the matter.
Although the investigations are so far preliminary, they could turn into a formal investigation, they said.
Spacs, which raises funds and then looks for a business to acquire, raised $ 80 billion globally in the first 10 weeks of the year, the vast majority in the United States. This has already eclipsed the record $ 79 billion that flooded these vehicles in 2020. Blank check companies promise private companies faster access to public markets than a traditional initial public offering.
Banks and law firms have enjoyed lucrative rewards and fees associated with the Spac structure. But critics have pointed to concerns about investor protection, the lack of transparency around incentives and the sky-high valuations attributed to young companies.
Reuters earlier reported that Wall Street banks had received letters from the SEC’s law enforcement division requesting information on how they were monitoring Spac risks. The SEC declined to comment.
« [The SEC] are certainly shaking their sabers ”towards the Spac market, said a lawyer who had seen the letters.
Given the popularity of the Spac vehicle, “it’s no surprise” that the SEC has started asking questions, said Doug Davison, a Linklaters partner in Washington. “This is the start of what I expect will be a thorough review of transactions and investor disclosures arising from the surge in those transactions,” he said.
The popularity of Spacs among retail investors has prompted the SEC to issue guidance on how the structure works and warn that companies may be pressured into entering into transactions that are contrary to the interests of investors.
In September, SEC Chairman Jay Clayton praised Spacs for increasing competition in the IPO market, but said there was a need for transparency around the compensation of Spac’s sponsors, who typically receive an award. 20% stake in the blank check company, essentially free of charge.
While the Spacs have typically been promoted by financiers, figures such as basketball star Shaquille O’Neal and baseball player Alex Rodriguez have also helped launch vehicles. Earlier this month, the SEC warned investors not to invest in Spacs just because they are promoted by famous people.