U.S. Securities and Exchange Commission officials are starting to probe the $200 billion market for SPACs, the so-called blank check acquisition companies that have attracted scores of celebrity endorsements while raising questions over the ethics of investing on Wall Street.
Reuters reported Thursday that the SEC's enforcement division is seeking information from several Wall Street banks on fees, volumes and internal controls in so-called Special Acquisition Companies, or SPACs, that have raced ahead of traditional IPOs as the hottest investment trend in the market this year.
SPACs are essentially shell corporations that raise money from investors, list on a stock exchange and then target a company for acquisition that is eventually merged into the existing listing. Nearly 300 SPACs have raised $96 billion so far this year -- compared to $83.4 billion over the whole of 2020 -- with another 230 waiting in the wings to add another $58 billion to the growing total.
However, the trend has also raised significant concerns from market watchdogs and consumer and investor advocates, who worry that the rush to market has come at the cost of sufficient due diligence of the black-check vehicles.
Last month, noted short-seller Hindenburg Research accused Chamath Palihapitiya's Social Capital Hedosophia Holdings Corp. III of misleading investors ahead of its merger with Clover Health Investments Corp.
Hindenburg, which insisted it had no position in Clover Health, said the group is under 'active investigation' by the U.S. Department of Justice linked to "at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals" based on a civil investigative demand it claims to have seen.
Insider trading concerns are also starting to grow, given the extended period between a SPACs inception and its ultimate merger with a takeover target.
The IPOX SPAC index, a benchmark for performance in the blank-check market, is up more than 48.7% over the past year, but have fallen some 22.5% from its February 17 peak amid a series of under-performing SPAC debuts and growing concerns over the lack of viable targets for the now 700-plus groups that are listed.