NEW YORK / WASHINGTON (Reuters) – U.S. securities regulator has opened investigation into Wall Street’s blank check frenzy and is seeking information on how insurers manage the risks involved, four people with direct knowledge of the matter.
The U.S. Securities and Exchange Commission (SEC) has in recent days sent letters to Wall Street banks asking for information about its special-purpose acquisition company or SPAC, the four people said.
SPACs are listed trading companies that raise funds to acquire a private company for the purpose of making it public, allowing these targets to avoid a traditional initial public offering.
The SEC letters asked banks to provide the information voluntarily and, as such, not reach the level of a formal investigative demand, two sources said.
However, one of those two people said the SEC’s enforcement division sent letters, suggesting they could be a forerunner of a formal investigation.
This person said the SEC wanted information on the commissions, volumes and controls banks have to monitor bids internally. The second source earlier said the SEC asked questions related to compliance, reporting and internal controls.
SEC representatives did not immediately respond to requests for comment outside of U.S. business hours.
Wall Street’s biggest gold rush in recent years, SPACs have risen globally to $ 170 billion this year, up from $ 157 billion last year, according to Refinitiv data.
The boom has been fueled in part by easy monetary conditions, as central banks have sent cash to economies affected by the pandemic, while the SPAC structure provides startups with an easier way to make themselves public with less. regulatory control than the traditional IPO route. But the frenzy has begun to meet with increased investor skepticism and has also caught the attention of regulators.
This month, the SEC warned investors not to compress SPAC based on celebrity recommendations and said it was closely monitoring SPAC disclosures and other “structural” SPAC issues.
Investors have sued eight companies that merged with SPAC in the first quarter of 2021, according to data collected by Stanford University. Some of the lawsuits allege that SPACs and their sponsors, who get huge paychecks once a SPAC is combined with their target, hid weaknesses before transactions.
The SEC may be concerned about the depth of due diligence that SPACs perform before acquiring assets and whether huge payments are fully disclosed to investors, a third source said.
Another potential concern is the increased risk of insider trading between when a SPAC is made public and when it announces its acquisition goal, the second source added.
“It’s asking the biggest banks on Wall Street: what’s going on?” said the person.
Report by Jody Godoy in New York and Chris Prentice in Washington; Edited by Michelle Price and Christopher Cushing