Citi to Pause New SPAC Issuance as SEC Signals Crackdown

(Bloomberg) -- Citigroup Inc. is among underwriters that have temporarily paused initial public offerings of new U.S. special purpose acquisition companies until they get more clarity on the potential legal risks posed by recently proposed rules, according to people with knowledge of the matter.

The New York-based bank is awaiting feedback from legal advisers regarding underwriter liability among other topics, said the people, who requested anonymity because the bank's decision isn't public. The firm has no plans to exit the business, some of the people said.

Last week, the Securities and Exchange Commission issued a sweeping plan for tightening oversight of SPACs after U.S. lawmakers and investor advocates argued the listings were bypassing rules imposed on traditional IPOs and exposing retail shareholders to risks. The SEC's proposal would broadly require SPACs to disclose more information about potential conflicts of interest and make it easier for investors to sue over false projections.

A Citigroup spokeswoman declined to comment.

Citigroup is among the U.S.'s most prolific SPAC underwriters, ranking second in 2020 and first in 2021. Over the two-year period, it raised $31.6 billion from 146 IPOs.

This year, issuance has slowed as SPACs have fallen out of favor with investors, in part due to lackluster returns following the consummation of a transaction. Still, Citigroup is ranked second behind Cantor Fitzgerald, having raised $1.12 billion from five deals, including $750 million for Harry Sloan's Screaming Eagle Acquisition Corp., according to data compiled by Bloomberg.

In its proposal, the SEC deemed the underwriters of a SPAC IPO to also be underwriters of the blank-check company's subsequent purchase of another firm, a deal known as the de-SPAC transaction.

“Underwriters play a critical role in the securities offering process as gatekeepers to the public markets,” the SEC wrote. The proposed rule should “should better motivate SPAC underwriters to exercise the care necessary to ensure the accuracy of the disclosure in these transactions,” the watchdog added.

The expansion of underwriter liability to include de-SPACs may lead to changes in the practices of investment banks “given the heightened risks,” lawyers from Sidley Austin LLP wrote in a memo to clients. “Investment banks involved with de-SPAC transactions do not typically conduct the same level of due diligence as they would for a traditional IPO,” the lawyers said.