According to Bloomberg, Goldman Sachs Group Inc. is ending its involvement with the majority of the special purpose acquisition companies it took public and halting new SPAC issuance in the United States. People familiar with the matter said that Bank of America Corp. has reduced its work with some SPACs and may retreat further as it evaluates its policies surrounding the transactions.
Their pullback follows an intense boom in the vehicles over the past couple of years, as financiers, politicians and celebrities piled into the deals that list on public stock exchanges to raise money so they can buy other companies. But new guidelines from the Securities and Exchange Commission have sucked air out of the balloon, which was already rapidly deflating thanks to souring markets, jittery regulators and dwindling returns for the deals.
“The SEC continues to spoil an already rather lame SPAC party,” said Oliver Scharping, a portfolio manager at Bantleon. “There’s virtually no money to be made with new issuances right now.”
The banks’ recent concerns center around liability risks stemming from the new rules, which are aimed at tightening oversight on a market after it set back-to-back yearly records. The proposals would require SPACs to disclose more information about potential conflicts of interest and make it easier for investors to sue over false projections.
They also would require underwriters of a blank-check offering to also be underwriters of the SPAC’s subsequent purchase of a target firm, known as the de-SPAC. That expansion of underwriter liability poses a greater risk for investment banks, prominent law firms have cautioned.
And so far, it has put the brakes on for Wall Street’s biggest banks with others expected to follow. Citigroup Inc. paused initial public offerings of new U.S. SPACs until it gets more clarity on the potential legal risks posed by the guidelines, Bloomberg reported last month.
Goldman is retreating because of the proposed rules, though it may elect to continue the advisory work with a small number of SPAC clients in rare cases. Bank of America, which is also continuing selective work with some deals, has ended its relationships with some SPACs and been in discussions with clients on navigating the current environment, Bloomberg reported.
Together, Bank of America, Citigroup and Goldman accounted for more than 27% of U.S. SPAC deals since the start of last year, overseeing about $47 billion of the transactions, according to data compiled by Bloomberg.
A SPAC works with its adviser even after going public to complete its merger with a target firm, known as the de-SPAC transaction. If it fails to complete that deal, it’s forced to return capital to investors.
The recent retreat is likely to anger clients who had stepped up capital to get their SPACs off the ground and are still seeking takeover targets to complete their mergers. It’s unusual for a bank to withdraw from an active blank-check firm because it typically works on the de-SPAC as well. The move risks leaving the sponsor of the SPAC — its client — in the lurch and unhappy.
The sentiment also weighed on shares, with the De-SPAC Index — which tracks 25 companies that have gone public through a merger with a SPAC — plunging 10.4% on Monday. U.S.-listed special purpose acquisition companies raised $679.3 million via initial public offerings in April, 89% less than the monthly average of $5.95 billion in the last year, Bloomberg data show.