SEC Inquiry Into Blank-Check Boom Could Be Just The Start

Law360 (March 25, 2021, 8:58 PM EDT) — Reports that the U.S. Securities and Exchange Commission is inquiring deeper into the explosion in blank-check offerings could be a prelude to further investigation to assure that investor protection concerns are being met, attorneys said Thursday.

The SEC’s focus reportedly centers on the practices of investment banks that underwrite initial public offerings by blank-check vehicles, also known as special-purpose acquisition companies, or SPACs, which lay the groundwork for an eventual merger. Once a subset of the IPO market, these so-called blank-check offerings now far outstrip traditional IPOs and are shaking up capital markets in ways that regulators and market participants are still sorting out.

Foley & Lardner LLP corporate partner Nicole Hatcher expects that the SEC is concerned about risks posed to ordinary investors, noting some similarities between the SPAC surge and the 2017 boom in crypto-based financings known as initial coin offerings, which led to stricter oversight.

“I think this is the first step in making sure that folks know the SEC is watching and that they will start taking further actions,” said Hatcher, who works in the firm’s Silicon Valley office in San Francisco, a region where SPACs are proliferating.

The extent of the SEC’s latest inquiry is not fully clear.

Reuters reported late Wednesday that the SEC is seeking information on how underwriters are managing risks involved with SPACs, citing anonymous sources. SEC enforcement officials sent letters to Wall Street investment banks inquiring about fees, volumes, and what controls banks have in place to police the deals internally, Reuters reported, adding that banks were asked to provide information voluntarily and that the inquiry is not considered a formal investigation.

Bloomberg reported that investment banks are expecting letters from regulators asking about the potential dangers of underwriting a torrent of deals, also citing anonymous sources. The news organization reported that the inquiry so far appears to be mostly fact-finding.

The SEC did not respond to requests for comment Thursday.

SPACs have been around for decades but exploded in the early phase of the coronavirus pandemic and have stayed red-hot. Year to date, 296 SPACs have completed IPOs and raised more than $96 billion, according to That eclipses the total for all of 2020, which exceeded the entire past decade.

SPACs are shells that raise money through an IPO in order to acquire a private business and take it public, handing the target a ready-made listing. These vehicles can provide target companies a quicker path to public markets than a conventional IPO, among other advantages for targets including more flexible rules regarding the discussion of financial projections with investors.

Plus, SPAC founders are well compensated for their efforts. They often receive up to 20% of the target company’s public shares, providing founders a strong incentive to complete an acquisition.

As SPACs surge in volume, observers are scrutinizing their performance. Academic studies show that shares of companies that went public through blank-check vehicles lag the broader market, suggesting that many public shareholders are not benefiting from these deals.

“The speed at which SPAC transactions move creates a lack of transparency,” Hatcher said. “One of the major issues is that the incentives of the SPAC sponsors are not aligned with investors.”

Market participants will also be watching to see how shares of companies taken public by SPACs fare in the coming months when lockup periods that so far have constrained insiders from selling shares begin to expire. An increase in shares being sold could place further downward pressure on the stocks of such companies, potentially worrying regulators.

“When the ball drops, [the SEC] will be asked: What did you do to prevent this?” said Foley & Lardner partner Louis Lehot. “A lot of the lockups in these transactions are going to be expiring in the summer. We think that that will be a critically important time for the SPAC product.”

Word of the SEC inquiry has been preceded by signs that regulators are paying closer attention to this sector. Acting SEC Chair Allison Herren Lee recently expressed concern that studies show that SPAC “performance for most investors doesn’t match the hype.”

The SEC’s Division of Corporation Finance also issued guidance in December advising companies on sound disclosure practices to assure that investors understand how valuations are determined in SPAC mergers and are notified of conflicts of interest. Lehot said SEC staff is likely collaborating on its oversight of SPACs, which could result in more enforcement actions and new rulemaking.

SPAC proponents tout these vehicles as an efficient way to bring more public companies to market, including emerging businesses at earlier stages of their growth. SEC Commissioner Hester Peirce has also warned against regulatory overreach in response to the SPAC boom.

“Well-intentioned increased regulatory obligations around SPACs could make them less cost-effective,” Pierce told the SEC’s Investor Advisory Committee earlier this month.

Hatcher cautioned that it can also be unwise for private companies to pursue public markets at early stages, especially if they haven’t fully developed a product.

“It feels a little bit like the Wild West out here,” Hatcher said. “I think we need some more oversight.”

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