As an army of blank-check companies gathered $250 billion on their march to public stock markets over the past two years, banks handling the fundraisings earned windfalls and lavished star dealmakers with some of their firm’s largest bonuses.
But this year, many of those special-purpose acquisition vehicles, or SPACs, are struggling to seal the deals that are their reason for being -- merging with private companies. And this month, top banks including Goldman Sachs Group Inc. and Bank of America Corp. pulled back from helping them hunt for targets.
The problem: US regulators proposed holding banks liable if the SPACs or their businesses mislead investors.
Behind the scenes, Wall Streeters are hastily reevaluating one of their most lucrative activities in recent years. Some 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. As frustrated bankers see it, they’re essentially 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 magnitude of the exposure could be potentially enormous,” said Howard Suskin, co-chair of Jenner & Block’s securities litigation and enforcement practice. “All the plaintiffs have to show is that there was something incorrect that was said in the offering documents.”
To Securities and Exchange Commission Chair Gary Gensler, the fault lies with banks for thinking they could usher private companies’ into public markets without a duty to ensure shareholders get accurate information. After all, that’s the role of banks handling more traditional initial public offerings.
“The core concept of a traditional IPO is that there’s a gatekeeper and a gatekeeper has a certain set of responsibilities,” Gensler said during an interview with Bloomberg on Tuesday, a day after the news broke that Goldman and Bank of America were pulling back. The SEC has been gathering comments on its proposals for SPACs and has yet to finalize the new rules.
The banks’ retreat follows the rise and fall of the SPAC craze. Once a Wall Street niche, the vehicles came into vogue as the unpredictable pandemic took hold, making it harder to stage traditional IPOs. But in recent months, enthusiasm for SPACs has dissipated, hurt by softening markets and a growing number of prominent deals that fizzled.
Investors have growing reason to complain about SPACs’ performance. Blank-check vehicles announced 186 mergers last year that have since been completed. Of those, 95% are trading below the blank-check firms’ initial price of $10, data compiled by Bloomberg show, saddling investors with billions of dollars in losses. That compares with stock declines at about 76% of companies that held traditional IPOs.
In a traditional IPO, companies don’t typically give financial forecasts because banks underwriting their deals aren’t willing to stomach the risk of lawsuits if predictions don’t come true. But SPAC management teams, known as sponsors, have long made forecasts since the deals are essentially mergers -- sometimes with an optimism that later proves unrealistic.