NEW YORK / WASHINGTON, March 24 (Reuters) – US regulators have opened an investigation into the frenzy of buying Wall Street checks and are looking for information on how insurers manage the risks involved, they said four people with direct knowledge about this issue.
In recent days, the U.S. Securities and Exchange Commission (SEC) has sent letters to Wall Street banks seeking information on their special-purpose purchasing company’s or SPAC transactions, the four said.
SPACs are listed companies that raise funds to acquire a private company in order to make it public, thus allowing targets to bypass a traditional initial public offering.
The SEC’s letters required banks to provide the information voluntarily and, as such, did not amount to a formal request for an investigation, two sources said.
However, one of the two said the letters were sent by the SEC’s enforcement division, suggesting it could be a precursor to a formal investigation.
He said the SEC wanted information on SPAC fees, volumes and what controls banks have to control transactions internally. The second source stated above that the SEC addressed questions related to compliance, reporting and internal controls.
SEC representatives did not immediately respond to requests for comment outside the US work schedule.
The biggest gold rush on Wall Street in recent years, SPACs have grown globally to $ 170 billion this year, surpassing a total of $ 157 billion last year, Refinitiv data showed.
The boom was partly fueled by mild monetary conditions as central banks pumped cash into pandemic-affected economies, while the SPAC structure offers startups an easier way to go public with less regulatory control than the traditional IPO route. . But the frenzy has begun to face greater skepticism from investors and has caught the attention of regulators.
This month, the SEC warned investors against buying SPACs based on celebrity approvals and said it was closely following SPAC’s disclosures and other “structural” SPAC issues.
Investors have sued eight companies that combined with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits claim that SPACs and their sponsors, who collect huge paydays once the SPAC combines with its target, have hidden weaknesses before transactions.
The SEC could be concerned about the depth of due diligence carried out by SPACs before acquiring assets and whether huge payments are fully disclosed to investors, a third source said.
Another potential concern is the increased risk of privileged transactions between the moment a SPAC becomes public and the moment it announces its acquisition objective, the second source added.
“The biggest banks on Wall Street are asked: what’s going on?” said the person. (Reporting by Jody Godoy in New York and Chris Prentice in Washington; Editing by Michelle Price and Christopher Cushing)