Concern is growing that the source of Special Purpose Acquisition Companies, a 2020s echo of the dot-com mania of the 1990s, is bumping into the limits of Wall Street and Washington.
PSPC’s pipeline rushing to market is getting so crowded that bankers, lawyers and auditors turn down deals when they struggle to keep pace, according to people familiar with the matter. As the founders of blank check companies line up, the deep-pocketed investors needed to get them public have become disgusting.
About 300 PSPCs were launched this quarter on U.S. exchanges, raising nearly $ 100 billion – more than anything last year.
Yet since the start of last week, four transactions have been postponed, and about half of the PSPCs that have proceeded are trading below their offer prices. Some financial firms, including Deutsche Bank AG, have halted or slowed down SPAC’s new IPOs, people familiar with the matter said. And in Washington, Securities and Exchange Commission staff are said to be grappling with a growing pile of incomplete paperwork.
“There may have been a trading surplus,” said Anna Pinedo, capital markets lawyer at Mayer Brown LLP. “This may have raised concerns from investors about the possibility of analyzing and validating the deals to their satisfaction.”
PSPC veterans have been warning for months that some new entrants may overestimate their goals: tightly owned entities often lacking the good governance or operational maturity to organize their own stock offerings. Tech companies that are still working on their core products, such as aerospace start-up Archer Aviation and electric vehicle maker Lucid Motors, merged with PSPCs and became state-owned companies based not on revenue, but on their future projections.
Within the SEC, senior regulators have privately voiced concerns that the PSPC mania could potentially hurt retail investors. Over the past few weeks on Wall Street, talks of increased regulatory scrutiny and stricter commentary on the deals have cooled the market.
SEC processing of PSPC documentation is taking longer than before. In some cases, agency staff have warned lawyers that it could take a full 30 days to review documents and expect an additional two weeks to receive a response on the changes or amendments, according to people familiar with the law. situation.
One problem, another person said, is that more and more files arrive incomplete or contain errors. The agency is also facing a barrage of phone calls from lawyers asking questions about their transactions. To handle the flood, the SEC has expanded the unit that reviews PSPC filings, the people said.
An SEC spokesperson declined to comment.
Meanwhile, PSPC liability insurance rates are skyrocketing. About $ 10 million in coverage to compensate directors and officers of a blank check company now costs more than $ 1 million on average, according to an attorney who works on PSPC agreements. It went from $ 250,000 to $ 300,000 a year ago.
This is not the first time that the seemingly insatiable hunger for PSPCs has diminished. The months of October and November brought IPO fatigue and made it more difficult for PSPCs to raise the additional funds they needed to complete acquisitions. Donors for these injections, known as private equity investment, or PIPE, have started issuing smaller checks, delaying some transactions. This time, according to lawyers and bankers, some transactions will collapse.
“PIPE investors are increasingly demanding,” said Mitchell Presser, partner at Morrison & Foerster LLP. “In the long run, this will be beneficial for the PSPC market, as strong agreements and strong post-announcement exchanges will build confidence in PSPCs and support the continued strength of the market.”
– With the help of Michael Hytha.
Copyright 2021 Bloomberg.
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