(Bloomberg) -- Red-hot blank-check companies are getting scrutiny from the U.S. Securities and Exchange Commission, which wants to ensure investors are receiving appropriate disclosures about insiders' lucrative pay structures.
SEC Chairman Jay Clayton said Thursday that the regulator is reviewing so-called special purpose acquisition companies -- or SPACs -- because it's concerned that shareholders don't fully comprehend how incentives tied to executive pay differ from traditional initial public offerings.
”We have to pay attention to what's happening in the market and we are paying attention to whether the disclosure here is as it should be,” Clayton said in an interview with CNBC.
Clayton, who didn't mention any specific SPACs by name, added that the SEC can't dictate what's an appropriate pay structure, but it can dictate that compensation arrangements are adequately disclosed to investors.
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Following the comments, blank-check stocks were among the U.S. market's worst performers in early trading. Forum Merger II, DiamondPeak Holdings -- an electric-truck startup -- and Tortoise Acquisition Corp. all shed roughly a quarter of their value after trading began Thursday. The IPOX SPAC Index, which is followed as a benchmark for the investment vehicles, fell as much as 5.8% for its worst single-day performance since going live on July 31.
SPACs, which list on public stock exchanges to raise money for the purpose of acquiring other companies, have exploded this year. About 40% of this year's initial public offering volume has come from SPACs, and many prominent figures, such as venture capitalist Chamath Palihapitiya and former Citigroup Inc. banker Michael Klein, have vehicles still hunting for deals.
Read More: Why Blank Check Companies (SPACs) Are Filling Up Fast
SPACs can lead to outsized payouts for their management, a feature known as promote or founders shares. The arrangement is meant to incentivize insiders to find acquisition targets, while also compensating them for the cost of setting up SPACs and for their work in soliciting investors in the share offerings.
Executives are usually entitled to purchase 20% of a SPAC's equity at a nominal value of $25,000, a stake that stake can be worth millions when an acquisition is closed. Founders are also entitled to warrants that kick in when the shares trade above a target price post-merger.
As the U.S.'s primary stock-market regulator, the SEC polices company disclosures to ensure that investors have accurate information.
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