SEC Curbs on Fading SPAC Boom Have Wall Street Rethinking Role

(Bloomberg) -- Even before U.S. regulators announced a crackdown on blank-check companies, the market for the once-hot acquisition vehicles was slowing down.

Now, with some Wall Street banks hitting pause on underwriting those listings while they digest the potential rule changes, it could come to almost a complete standstill.

Just 37 special purpose acquisition companies have filed for a U.S. listing since the start of the year, according to data compiled by Bloomberg, compared with 451 filings during the same period in 2021. Even if all of them make it through to an initial public offering, they'll raise just $5.5 billion in total -- a fraction of the $93 billion raised by last year's same cohort.

The Securities and Exchange Commission last week said it would consider removing clauses that protect a SPAC's bankers and other advisers if estimates about the future performance of a blank-check company don't pan out, making them potentially liable for matters long after the IPO closes. It's a change that's aimed at discouraging companies from providing overly ambitious projections, and would bring the SPAC listing process closer to that of a traditional IPO.

It's also the culmination of months of warnings from SEC Chair Gary Gensler, who's repeatedly raised concerns about the blank-check firms, which list on public stock exchanges to raise money so they can buy other companies.

Celebrity Backers

After years in the sleepy backwaters of finance, SPACs became one of the hottest Wall Street plays in a two-year spree through 2021, raising more than $250 billion for acquisitions and accounting for about a quarter of the total IPO market. Celebrities from Alex Rodriguez to Martha Stewart backed SPACs and their merger partners, alongside established financiers such as Alec Gores and Chamath Palihapitiya, who launched multiple vehicles each. They did it with the help of Wall Street's biggest banks, which bulked up their advisory desks to win business in the rapidly expanding field.

Now, if adopted as is, the new SEC rules would categorize blank-check IPO advisers as underwriters, potentially ensnaring them in the ramifications of any subsequent merger -- even if they have little to do with helping a SPAC find and acquire a target.

“That's a departure to historical norms on who is considered an underwriter,” said Anna Pinedo, a partner at law firm Mayer Brown and co-lead of its capital markets practice. “For a lot of securities lawyers, it's difficult to comprehend,” she said.

Banker Pause

The proposal has been enough to spook some big underwriters, including Citigroup Inc., which has temporarily paused new SPAC listings as it awaits feedback from legal advisers regarding liability and other topics, Bloomberg News reported Monday. While Citi is listed as an adviser on five SPAC IPOs that raised a combined $1.1 billion this year, each of those listings was announced in 2021, and its name appears on just one blank-check filing made in 2022.

IPO advisers from several other banks also said they have informally paused work on new blank-check filings until they can meet with lawyers and flesh out the impact of the rules -- though they stressed that poor performances by newly-merged SPACs and a broader lull in the IPO market have also contributed to the hesitation. So far though, banks have stopped short of officially mandating a pause on SPAC work. Just one new blank-check listing has been filed since the SEC announced its latest proposals.

For More: SEC Plans to Curb Bullish SPAC Forecasts, Add Disclosures

Among the deals that have gone public, many are already being led by non-Wall Street banks. Traditional advisers like Citi and Goldman Sachs Group Inc., which tend to work with institutional sponsors, have ceded market share to smaller rivals such as EF Hutton, one of the advisers in the SPAC merger of former President Donald Trump's social media venture Truth Social.

Deals Decline

Mergers by blank-check companies have also significantly slowed with just 36 deals announced this year, less than half the number announced in the same period of 2021, the data compiled by Bloomberg show. The IPOX SPAC Index, which tracks the performances of pre- and post-merger blank-check companies, has lost a quarter of its value in the past year. And more SPAC investors are choosing to redeem their shares when a deal does go through, rather than stick around and wait to see what happens next.

Those who will have to wait, though, are the remaining SPAC market participants, who now have until late May to respond to the SEC's proposal. After that, the SEC will make any changes to the plans before holding a second vote to finalize the rules.

“There'll be very active comments,” said Mayer Brown's Pinedo. “I think a certain aspect of the proposal will be challenged.”