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The United States Securities and Exchange Commission (SEC) in recent days sent letters to Wall Street banks seeking information about their Special Purpose Acquisition Company, or SPAC, transactions, the four said.
PSPCs are listed shell companies that raise funds to acquire a private company for the purpose of going public, allowing these targets to bypass a traditional initial public offering.
The SEC letters asked the banks to provide the information voluntarily and, as such, did not reach the level of a formal investigation request, two of the sources said.
However, one of those two said letters had been sent by the SEC’s law enforcement division, suggesting they could be a precursor to a formal investigation.
This person said the SEC wanted information on PSPC transaction fees, volumes, and the controls banks have in place to monitor transactions internally. The second source above said the SEC asked about compliance, reporting and internal controls.
SEC officials did not immediately respond to requests for comment outside of hours of operation in the United States.
The boom was fueled in part by easy monetary conditions, as central banks injected liquidity into economies affected by the pandemic, while the SPAC structure offers startups an easier way to go public with less regulatory control. than the traditional IPO route. But the frenzy began to spark greater investor skepticism and also caught the attention of regulators.
This month, the SEC warned investors against buying into PSPCs on the basis of celebrity endorsements and said it was closely monitoring PSPC disclosures and other “structural” PSPC issues.
Investors sued eight companies that partnered with PSPCs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits allege that PSPCs and their sponsors, who reap huge paydays once a PSPC combines with its target, hid weaknesses before transactions.
The SEC may be concerned about the depth of due diligence PSPCs perform before acquiring assets and whether huge payouts are fully disclosed to investors, a third source said.
Another potential concern is the increased risk of insider trading between when a PSPC becomes public and when it announces its acquisition target, the second source added.
“We ask the biggest banks on Wall Street: what’s going on? Said the person.