The U.S. Securities and Exchange Commission is looking closely into a Wall Street backdoor that has allowed private companies to list on the stock market without going through the usual scrutiny of initial public offering launches.
SPACs, or special purpose acquisition companies, raise funds via a listing to acquire a private company with the purpose of taking it public. They have experienced a frenzy of popularity as both big institutions and small-pocketed investors jump in to capitalize on the loophole.
Some SPAC endorsements from U.S. celebrities and athletes include political activist, entrepreneur and former San Francisco 49ers quarterback Colin Kaepernick.
SPACs have raised more than $96.5 billion in less than three months so far in 2021. That tops the $83.3 billion raised in 2020, which was six times more than 2019, according to SPACInsider.
In March alone, more than $30.8 billion has been raised by SPACs compared to less than $1 billion from SPAC IPOs in March 2020, according to Julian Klymochko, founder and CEO at Accelerate.
“No wonder we’re in a bear market. The flood of supply has overwhelmed buyers and destroyed investor confidence,” Klymochko said in a tweet.
The SEC, which monitors brokers and stock exchanges, said it had opened an inquiry into this Wall Street’s blank check acquisition frenzy and is seeking information on how underwriters are managing the risks involved, according to a Reuters report.
Wall Street insiders said the SEC had in recent days sent letters to banks seeking information on their SPACs. The regulator sought information on SPAC deal fees, volumes, and what controls banks have in place to police the deals internally.
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The attraction of SPACs is that they can offer an easier path to go public, they are faster and come with less regulatory scrutiny than a traditional IPO. They also allow a private company to provide forward guidance several years out.
There are currently 400+ SPACs searching for an acquisition target.
Some of the companies that have gone public using SPACs include WeWork, an office-leasing company whose IPO failed in 2019 after investors got concerned about its overvaluation, forcing the CEO and co-founder Adam Neumann to resign.