SPACs Gain a New Follower: The SEC
March 30, 2021 | Rebecca Monck Ricigliano, Daniel L. Zelenko, Rebecca Lennon Baskin
Over the last several months, special purpose acquisition companies or “SPACs,” have become the hottest investment vehicle on the market. Now, they have sparked the interest of another, perhaps less desired audience member – the Securities and Exchange Commission. Recently, the SEC began sending letters to Wall Street banks seeking information on their dealings with SPACs. Although it has been reported that the letters asked the banks to voluntarily share information, they were sent by the SEC’s Division of Enforcement, suggesting that this may be the beginning of an SEC effort to launch formal investigations into SPACs and the Wall Street banks that underwrite them.
Now associated with big name celebrities and fueled by an infusion of cash into pandemic-hit economies, SPACs have had an unprecedented rise to stardom this year, raising $170 billion in 2021 alone. As described by the SEC, a SPAC is a type of blank check company used to facilitate bringing a private company public. The most common type of SPAC transaction occurs when a SPAC shell company acquires a private company after the shell company completes its own IPO. But because SPACs lack the financial history and disclosures that operating companies have when they go public, investment in SPACs carry greater risks. Indeed, investors who invest in the shell company during its IPO or through other fundraising efforts must rely on the purported expertise of SPAC managers to acquire sensible companies in the future to turn a profit.
That risk, however, has not curtailed investment interest. In fact, a quick search of “SPAC” on the Wall Street Journal’s website turns up six articles announcing SPAC development news published within a twenty-four hour period. The articles report on a SPAC acquisition of a space infrastructure firm, discussions between two major digital publishes to combine their portfolios through a SPAC, and two new SPACs being developed separately by Odell Beckham Jr., an NFL wide receiver, and the owner of Playboy Brand, among other stories. And last week, WeWork, the privately held shared-office space provider, announced that it would be going public by merging with BowX Acquisition Corporation, a SPAC run by Vivek Ranadivé, owner of the Sacramento Kings, that also lists Shaquille O’Neal as an adviser.
So while there is no sign that interest in SPACs is waning, the SEC’s increasing scrutiny, which seems primarily to be focused on banks’ internal controls, suggests that banks, as well as SPAC managers, would be wise to bolster their internal controls and reporting practices to account for the risks associated with these new vehicles. Creating positions for internal compliance officers or retaining external compliance counsel and accounting firms could be sage moves not only for the security of the banks and SPACs generally, but also to assuage the SEC’s concerns that the popular investment vehicles are operating and fundraising with too little oversight.