Goldman Sachs Group Inc. is pulling out of working with most SPACs it took public, spooked by new liability guidelines from regulators and throwing into doubt the fate of billions raised for those blank-check vehicles.
The Wall Street giant, the second-biggest underwriter of special purpose acquisition companies last year, has been telling sponsors of the vehicles it will be ending its involvement, according to people with knowledge of the matter. The bank is also electing to pause new U.S. SPAC issuance for now, one of the people said.
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. In cases where the public company is very close to completing the de-SPAC process, Goldman will fulfill its role, two of the people said.
Goldman may also elect to continue the advisory work with a small number of SPAC clients in rare cases. Other sponsors will need to seek new advisers to take over the role vacated by the bank.
SPACs were the hottest toy on Wall Street over the past couple of years, drawing financiers, politicians and celebrities, who were able to make easy millions from investors piling into the investment vehicles. SPACs, or blank-check firms, list on public stock exchanges to raise money so they can buy other companies. New guidelines from the Securities and Exchange Commission have helped put an end to the party.
The SEC has embraced a sweeping plan for tightening oversight of SPACs including exposing underwriters to greater liability risk. U.S. lawmakers and investor advocates have argued the listings were bypassing rules imposed on traditional initial public offerings and exposing retail shareholders to extra risks. The SEC’s proposal would require SPACs to disclose more information about potential conflicts of interest and make it easier for investors to sue over false projections.
“We are reducing our involvement in the SPAC business in response to the changed regulatory environment,” said Maeve DuVally, a spokeswoman for New York-based Goldman Sachs. The policy could change if the SEC guidelines are scaled back.
The SEC has deemed the underwriters of a blank-check offering to also be underwriters of the SPAC’s subsequent purchase of a target firm. Prominent law firms have cautioned that the expansion of underwriter liability to include de-SPACs carries greater risk for investment banks.
“Investment banks involved with de-SPAC transactions do not typically conduct the same level of due diligence as they would for a traditional IPO,” lawyers from Sidley Austin LLP wrote in a memo to clients.
Even before the SEC crackdown, souring markets, agitated regulators and the plunging stock of prominent companies that went public by merging with blank-check firms had cast a chill on the market.