US SEC reportedly opens investigation into SPAC IPO frenzy

SPACs are listed shell companies which raise funds to acquire private companies with the purpose of bringing them to the public market

The US Securities and Exchange Commission (SEC) has opened an investigation into the frenzy of special purpose acquisition companies (SPACs) IPOs on Wall Street, amid concerns about the risks involved.

According to an exclusive report by Reuters, which quotes four people familiar with the situation, the US regulator has written letters to Wall Street banks requesting information on how they are managing the risks associated with these "blank cheque" vehicles.

SPACs are listed shell companies which raise funds to acquire private companies with the intention of bringing them to the public market, thereby bypassing the traditional IPO route.

Reuters reports that at this stage it is not an official investigation as the SEC is asking for information to be provided voluntarily.

However, the report also suggests a formal investigation will follow as the letters were sent by the SEC's enforcement division.

The regulator is seeking information on SPAC deal fees, volumes, and the internal controls banks have in place to police the deals, as well as questions regarding compliance and reporting.

The news comes after the SEC warned investors earlier this month against buying into SPACs based on celebrity endorsements, as it said it was closely monitoring their disclosures and other "structural" issues with the vehicles.

The full-year annual record of 256 SPAC IPOs set in 2020 has already been surpassed this year, with 258 launched by 11 March, of which 250 were in the US, according to Refinitiv research.

Commenting on the latest news from the US, Jeffrey Halley, senior market analyst for Asia Pacific at OANDA, wrote: I felt that reports this week that WeWork was preparing to list via a SPAC at a $9bn valuation, must surely represent 'peak SPAC'.

You remember, it's the serviced office company with ping pong tables that all those clever finance people thought was worth $50bn less than two years ago. Perhaps the SEC agrees with me?, he said. 30+ years of gnarled existence as a pilot fish in the financial markets has imbued an ‘if it's too good to be true, it always is' mindset on me. SPAC-mania fits that bill nicely.

According to data compiled by Stanford University, investors have sued eight companies that combined with SPACs in the first quarter of 2021 so far, with some suggesting the SPACs withheld information on the companies' weaknesses ahead of the transaction.