The US financial markets regulator has confirmed it has concerns around the rapid growth of Special Purpose Acquisition Companies (SPACs).
US Securities and Exchange Commission acting director for the division of corporate finance John Coates said there are concerns around fees, conflicts, sponsor compensation, celebrity sponsorship and retail investors being drawn to SPACs by "baseless" hype.
He said due to the sheer amount of capital pouring into SPACs, the SEC is looking carefully at filings and disclosures by SPACs and the private companies they seek to buy up.
SPACs are essentially shell companies with no operations, which offer securities for cash through a conventional underwriting to fund a future acquisition of a private company.
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The SEC is concerned that SPACs circumvent some investor protections because they are not subject to all the same securities law liabilities as a vanilla initial public offering.
"First, and most directly, all involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. Simply put, any such asserted difference seems uncertain at best," Coates said.
"SPAC sponsors and targets and their affiliates and advisers should already be providing the public with the information material to the investment opportunities a de-SPAC represents, regardless of how the liability analyses ultimately play out.
"Liability risk is an important feature of the conventional IPO process. If that risk drives choices about what information to present and how, it should not in my view be different in the de-SPAC process without clear and compelling reasons for and limits and conditions on any such difference."
He added that law makers could not have predicted the SPAC boom, so it is important that safe harbour laws are revisited to make sure investors are protected.
The SEC's renewed focus on SPACs comes as Citigroup's quarterly results made it clear that the world's largest financial institutions are benefiting from the boom.
Citi reported investment banking revenues of US$2 billion, increasing by 46%. It acknowledged that this revenue growth was primarily driven by higher SPAC activity.