Goldman Sachs halts work on new Spacs after SEC takes tough action
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Goldman Sachs has put a stop to the new Spac offerings, with people familiar with the matter saying that the blank-check companies have suffered another blow as regulators have closed on the once-booming market.
The move marks a setback for Wall Street Investment Bank, which last year was ranked as the second-largest underwriter for special purpose acquisition companies, helping sponsors raise nearly $ 16bn, according to data from Refinitiv.
Goldman will also stop working with the majority of specs that helped take the public, one person added.
Spacs are shell companies that collect money from investors and list in the stock market. Their sponsors then look for a private company to take over the public through a merger. Vehicles experienced a wave of popularity in 2020, but regulators have since turned to scrutiny.
The U.S. Securities and Exchange Commission proposed reforms to the Spac market in March aimed at improving transparency and bringing in more rules in line with traditional initial public offerings.
The proposal, which is open to public comment, would increase the obligation on underwriters, requiring banks operating on the Spac IPO to work on subsequent mergers as well. Banks will also be held responsible for any misrepresentation related to the merger.
“We are reducing our involvement in the Spac business in response to the changed regulatory environment,” Goldman said.
Goldman is the biggest winner of the recent Spac Boom, which has enjoyed lucrative fees while working on the Spac IPO and subsequent mergers, but has been pushed back by declining investor interest and declining performance. Bloomberg had earlier reported that the bank was reducing its involvement with Spacs.
Citigroup has also taken a more cautious approach to Spacs in compliance with the proposed rules, a source said. The group, which is the top underwriter of Spac IPOs in 2021, has not been working on a new blank-check list since the proposal was released.
Banks typically receive a fee of about 5 percent of Spac’s IPO proceeds, of which approximately 3.5 percent is received upon completion of a blank-check vehicle merger with a private company.
The SEC’s proposal considers deferred fees to prove “a strong financial interest” in the completion of the merger and therefore the banks should be considered as the underwriter for the agreement and accept any relevant obligations.
“This is a very important rewriting of the historical practice of what an underwriter deserves as an obligation,” said one of SPAC’s lawyers. “Banks are all concerned about being considered an underwriter.”
The SEC’s proposal led to a regulatory inquiry into SPAC deals last year.
Lucid Motors, an electric car company that went public through a merger with Churchill Capital Corporation IV, was questioned over its revelations when the company was listed.
Digital World Acquisitions Corp., former U.S. President Donald Trump’s entertainment start-up, Trump Media and Technology Group, a public takeaway speck, said last December that authorities were investigating information between the two groups.