Wall Street's biggest banks are expecting the U.S. Securities and Exchange Commission to step up its oversight of the red-hot SPACs market.
Officials at major firms are anticipating letters from regulators asking about the potential dangers of underwriting a deluge of deals from so-called blank-check companies, according to two people familiar with the matter.
For now, the inquiry appears to be mostly fact-finding, but it could turn into something more formal depending on what regulators uncover, one of the people said, asking not to be identified because the matter is private.
The development follows increasing concerns — including some raised by SEC officials — that the SPAC frenzy has gotten out of control and will end badly for investors. While banks have been pushing SPAC deals out the door for months, one impact of the regulator's move could be a chilling effect that prompts firms to tap the brakes.
An SEC spokesman declined to comment.
The explosive growth of SPACs is hard to overstate. Through the middle of this month, almost $73 billion had already been raised in 2021 from investors through 226 offerings, accounting for more than 70% of the market for initial public offerings. That compares with $83.3 billion raised from 248 SPACs in 2020 and $13.6 billion from 59 deals in 2019.
Despite the recent surge, SPACs have been around for decades. They are publicly traded shell companies with no revenue that raise money from shareholders with the goal of buying a business — meaning investors are basically betting on the ability of those who formed the SPAC to strike a lucrative deal down the line. Those who've started them since last year include sports figures such as Alex Rodriguez and Shaquille O'Neal and billionaire investor William Ackman.
A top worry is that as more and more SPACs sell shares, there will be few viable companies available for them to acquire, leaving investors holding the bag if SPAC share prices tank.
That's a concern, acting SEC Chairman Allison Lee said earlier this month, saying the agency has seen "more and more evidence on the risk side of the equation for SPACs as we see studies showing that their performance for most investors doesn't match the hype."
The SEC has also warned against buying stakes in SPACs based solely on endorsements from celebrities. The regulator didn't single anyone out specifically.
"Given the explosion in popularity of SPACs, it's no surprise that enforcement is asking questions," Former SEC enforcement supervisor Doug Davison, a partner at Linklaters, said in an email. "This is the beginning of what I expect will be heightened scrutiny of trading and disclosures to investors arising from the surge of these transactions."
Staff writer Hazel Bradford contributed to this article.