The U.S. securities regulator has ramped-up its inquiry on Wall Street’s blank check acquisition frenzy, homing in on potential conflicts of interest created when banks act as underwriters and advisers on the same deal.
The Securities and Exchange Commission is exploring whether certain fee structures may incentivize underwriters on special purpose acquisition company potentially putting investors at risk. Banks that have received SEC requests for information include top SPAC underwriters Citigroup, Credit Suisse Group, Morgan Stanley and Goldman Sachs. Spokespeople for the banks declined to comment on this. SPACs are listed shell companies which is used to take private companies public. And this is by sidestepping the more traditional and lengthy initial public offering (IPO) process.
The SEC’s enforcement division had opened an inquiry on Wall Street banks’ SPAC dealings, sending letters to several institutions seeking information on deal risks and internal controls. Since March, the SEC has focused its inquiry on a group of banks, law firms and SPAC sponsors involved in troubled deals and has sought more information about the deals and interviewed executives concerned. The SEC is particularly interested in the fee banks have earned when playing several roles on a deal. One of the people said that the big issue for the SEC is to understand if the advisers are conflicted. A spokesperson for the SEC did not respond to requests for comment.
SPAC sponsors typically pay banks a 5.5% fee for underwriting the IPO. Underwriting banks can earn more fees if they also go on to represent the merger target and help the SPAC sponsor raise additional cash from private investors. The SEC is examining potential conflicts in such situations. Such arrangements could incentivise banks to talk up targets or play down potential problems and that could harm investors if the target company’s earnings underperform. Regulatory requests for information do not necessarily imply wrongdoing.
Under the rules, lawyers and accountants are required to disclose their fees in the SPAC’s regulatory filings, but banks are not. SPACs have existed for decades, but over the past 18 months the deal structure has been popularized by high-profile sponsors. A record nearly $100 billion was raised by U.S. SPACs in the first quarter of 2021, according to Dealogic, before deal making flagged amid market saturation and heightened SEC scrutiny.