The Multibillion-Dollar Risk Driving Big Banks Away From SPACs
Morris F. DeFeo, chair of Herrick's Corporate Department, spoke to Bloomberg about how top banks have been pulling back from helping special purpose acquisition companies (SPACs) identify private companies with which to merge because of the proposal from US regulators to hold banks liable if the SPACs or their businesses mislead investors.
According to the article, behind the scenes, banks are "concluding that helping a SPAC stage an initial public offering and later merge with a private company is poised to become too complex and risky, potentially creating massive liabilities. . . . Essentially, bankers are being told to follow the rules for IPOs and mergers simultaneously, while the government makes it easier for shareholders to sue if deals don’t work out."
The article notes that the life cycle of a SPAC begins when sponsors put up a relatively small amount of money. The sponsors then hire a bank to help hold an IPO, seeking to raise additional funds to hunt for a merger. "Banks can later earn more by helping the blank-check firm merge with a private company, thus taking it public, in a process known as a de-SPAC. That’s when projections are made."
The new SEC proposals seek to inhibit overly positive projections by determining that the banks that underwrite an IPO are also the “statutory underwriters” for the de-SPAC, if they assist with that part of the process.
“It was inevitable that the SEC would propose these changes,” said DeFeo. “Whenever a particular segment of the market gets frothy, the SEC will inevitably want to get involved.”
Read the full piece in Bloomberg here. Access may require a subscription.