Compliance
SEC Puts Blank Check Company Boom Under Microscope - Media

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.”