Just a few years after helping banks create a giant market for “blank check” companies, they are turning away from deals, fearful of risk.
Goldman Sachs has ended its engagement with most Special Purpose Acquisition Companies (SPAC)which was put forward, and temporarily stopped issuing new US SPAC companies, according to Bloomberg Agency.
The agency quoted sources as saying that Bank of America has reduced work with some special purpose acquisition companies, and could back down further as it evaluates its policies surrounding the deals.
This decline comes after a massive boom in this type of company over the past two years, as financiers, politicians and celebrities flocked to empty companies listed on public exchanges to raise money so they could buy other companies.
But the new guidelines issued by the Securities and Exchange Commission, absorbed a large part of the bubble before it burst, according to “Bloomberg”.
This prompted the focus of recent banks’ concerns about the liability risks arising from the new rules, which aim to tighten market supervision after it recorded successive annual records.
The new proposals drawn up by the SEC will require the SPACs to disclose more information about potential conflicts of interest and make it easier to sue investors over false expectations.
They will also require investment banks underwriters to cover the underwriting of “blank check” companies’ offerings to also be custodians of subsequent merger deals on target companies, a process known as de-SPAC. Leading law firms have warned that expanding liability insurance poses a greater risk to investment banks.
Citigroup, in turn, has paused initial public offerings of new US “blank check” companies until it gets more clarity about the potential legal risks posed by the guidelines.
Goldman Sachs also backed down over the proposed rules, although the US giant may choose to continue consulting work with a small number of SPAC clients in rare cases.
Bank of America, Citigroup, and Goldman together have acquired more than 27 percent of US SPAC deals since the beginning of last year, and have overseen more than $47 billion in deals, according to data compiled by Bloomberg.
Special Purpose Acquisitions or SPACs work with investment banks that advise them even after they go public to complete their merger with a target company, which is known as a de-SPAC deal, and if they fail to complete this deal, they are forced to return the capital to investors.
The withdrawal is likely to irritate clients who have raised capital to take out their SPVs and are still looking for acquisition targets.
It is unusual for the bank to withdraw from an active blank check company — which has raised money from underwriters — because it usually works on the second tier of the deal, or de-SPAC as well, a move that would leave sponsoring banks for their blank check corporate clients in limbo.
Sentiment also weighed on stocks, with the De-SPAC Index – which tracks 25 companies that went public through a merger with SPAC – down 10.4% on Monday.
US-listed special purpose buyouts raised $679.3 million through initial public offerings in April, 89% lower than the monthly average of $5.95 billion last year.