SEC Official Raises Red Flag On SPAC Risks

Paul Munter, acting chief accountant at the Securities and Exchange Commission (SEC), issued a warning Wednesday (March 31) to Wall Street over the problems with special purpose acquisition companies (SPACs), Reuters reported.

“We encourage stakeholders to consider the risks, complexities and challenges related to SPAC mergers, including careful consideration of whether the target company has a clear, comprehensive plan to be prepared to be a public company,” he said in a statement, according to Reuters.

SPACs, or blank-check companies formed only to help take other companies public, have surged in the past year. The value of them cumulatively has risen to $170 billion this year, a record, Reuters reported.

That boom has been spurred, at least in part, by the lax monetary conditions as central banks have been funneling money into the pandemic-ravaged economies, according to Reuters. The general structure of SPACs gives startups an easier way to go public, providing less regulatory scrutiny than the usual initial public offering (IPO) route.

Concerns have arisen, though, as the frenzy of activity has prompted regulators and investors to be more skeptical. The statement on Wednesday comes after the agency sent letters to Wall Street saying it wanted information on their SPAC dealings, Reuters reported.

Investors have sued eight companies that combined with SPACs this year so far. Some of the lawsuits say the SPACs and their sponsors, which get large payments from the transactions, hid weaknesses in the companies before going public, according to Reuters. The SEC might also be worried about the due diligence that goes into SPACs before they acquire assets, along with concerns about disclosures to investors.

PYMNTS reported that Wall Street’s appetite for SPACs might be falling, with the number of first-day trading pops falling. While share price rises were common earlier in the year, lately they’ve been down, with companies that used SPACs doing broad selloffs.