Compliance

SEC Puts Blank Check Company Boom Under Microscope - Media

Tom Burroughes, Group Editor, March 25, 2021

articleimage

Perhaps it was only a matter of time before the SEC put the phenomenon of blank check companies under its regulatory gaze. The sector has expanded hugely over the past year, even drawing in sports stars to the fray.

The principal US financial regulator is starting to probe blank check firms to find out how much underwriters of these entities manage, and the risks of these fast-expanding entities, a media report said.

Sources with direct knowledge of the matter told Reuters that the Securities and Exchange Commission has sent letters to banks seeking information on their SPAC dealings. The letters, sent by the enforcement division of the SEC, suggest that it might be a precursor to a formal investigation, the news agency said.

The SEC declined to comment to Family Wealth Report about the story.

The SPACs sector has surged massively over the past year; these entities enable investors to back sponsors who then seek a private entity to take public over the stock market. The surge has already prompted worries that the SPAC phenomenon is a bubble. Ultra-low interest rates, and the fact that SPACs allow firms to list on the stock market with relatively light regulatory scrutiny, has driven the boom.

A sign of potential problems came when sports celebrities and others - not normally associated with high finance - became involved in the area. 

A report by Bloomberg (March 14) said that a record $162.4 billion has been raised by more than 600 issuers in 2021, the most ever at this point in the year, data from the news service shows. SPACs account for half of the proceeds. In comparison, just $37 billion was raised in the first three months of 2020.

This news service has been told that ultra-wealthy individuals, including those with family offices, have been involved in some of these SPAC deals, both on the corporate finance, money-raising side, and as investors. These entities have actually been around for a while. Some commentators urge market participants to be careful. 

For example, in a recent editorial for the Wall Street Journal, Michael Klausner, a professor at Stanford Law School, and Emily Ruan, a management consultant in San Francisco, wrote that the SPAC trend was a bubble which could soon burst.

As previously reported, Paul Bernstein, the vice chair of Venable LLP’s entertainment and media group, reckons that SPACs have a short window over which to spend the cash. 

“One of the oddities of SPAC-driven M&A activity is that SPACs generally have a two-year time limit in which to either put their cash to work in one or more acquisitions or return it to their public stockholders. This naturally creates a tremendous incentive for those running the SPACs (who typically own highly preferential “founders’ shares” in their SPACs) to close deals before the time limit is up,” he wrote in a recent commentary.

“When a SPAC raises money, it includes `Risk Factors’ in its prospectus in order to alert investors to certain dangers of buying the SPAC shares. The following text, quoted from a recent SPAC prospectus, should be music to the ears of potential acquisition targets: `The requirement that we complete our initial business combination within the prescribed time frame (i.e., two years) may give potential target businesses leverage over us in negotiating a business combination.’

“Imagine sitting across the negotiating table from someone who has $100 million of other people’s money in their wallet and – in a twist on Hitchcock’s distinction between suspense and surprise - both you and they know that the wallet will blow up on a certain day two years hence. The SPAC cannot conceal the date by which it must either spend its money or return it to stockholders, because that date is disclosed for the world to see in the SPAC’s public filings with the Securities and Exchange Commission.”

Register for FamilyWealthReport today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes