SPAC retreat shows Wall Street awakens to risk

WASHINGTON: Wall Street’s pullback from deals involving blank-cheque companies signals that major financial firms are concerned about the regulatory risks associated with the transactions, says US Securities and Exchange Commission (SEC) chair Gary Gensler.

While Gensler declined to discuss specific firms, his comments about the once hot market come as Goldman Sachs Group Inc, Bank of America Corp and Citigroup Inc are distancing themselves from deals involving special purpose acquisition companies (SPACS).

Concern about an SEC crackdown has prompted Goldman Sachs to pull out of most work on SPACS and Bank of America to end relationships with some of the vehicles, Bloomberg News reported.

Rules the regulator proposed in March were meant to ensure that SPAC deals – and those involved in them – get more scrutiny, according to Gensler.

That proposal would tighten oversight of the market, require blank-cheque companies to disclose more information about potential conflicts of interest and impose new responsibilities on banks underwriting the transactions.

“For some market participants, they felt that they could arbitrage a set of rules and maybe there would be different rules applying to traditional initial public offerings (IPOS) than these Spac-target initital public offerings,” Gensler said in an interview with Bloomberg in Washington.

“The market has found it’s not necessarily less costly and it’s not necessarily more timely.”

For Wall Street, a major issue with the SEC’S proposal is that it would make it easier for investors to sue over false projections.

The SEC would consider underwriters of blank-cheque offerings to also play a similar role in the SPAC’S purchase of a target firm – known as a DE-SPAC. That provision could pose a direct risk for investment banks.

Bank of America declined to comment on Gensler’s remarks.

On Monday, Goldman Sachs said it’s reducing its involvement “in response to the changed regulatory environment”.

Citigroup paused new US SPACS, Bloomberg reported last month, and the bank declined to comment at that time.

Blank-cheque deals have fizzled. The DE-SPAC Index – which tracks 25 companies that have gone public through one of the combinations – has plunged.

Us-listed SPACS raised Us$679.3mil (Rm2.98bil) via IPOS in April, 89% less than the monthly average of Us$5.95bil (Rm26.1bil) in the last year, according to Bloomberg data.

Gensler said the SEC’S proposed rule changes would ensure that SPAC acquisition targets are treated the same way that traditional IPOS are.