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Goldman Sachs Group is ending its relationship with most of the special-purpose acquisition companies (SPACs) it helped to take public over the past two years, people familiar told Bloomberg.
The company—the second largest underwriter of SPACs since 2020—is worried about its liability for SPACs’ performance under new regulatory guidelines.
A SPAC or “blank-check company” is a special category of company that goes public, typically at $10 a share, even though it has no assets. When it has stockpiled enough capital, the SPAC buys and merges with a promising company that is not ready to go public.
After the merger, the SPAC disappears, and its shareholders then own shares in the company the SPAC bought.
Because SPACs’ takeover targets are private companies that have not filed papers to make a stock offering, they can make unsupported, blue-sky financial projections about their future, which companies planning to go public are banned from doing.
If a SPAC fails to merge with a company within two years of going public, it must return the capital to its investors.
An underwriter such as Goldman continues to work with the SPAC after it goes public, guiding its merger with a target company.
TRENDPOST: We followed the rise and subsequent troubles of SPACs in articles such as “SPACs Raise Regulators’ Concerns” (30 Mar 2021), “SPACs Beware!” (13 Apr 2021), “SPACs: Danger Ahead” (29 Jun 2021), and “Knives Are Out For SPACs” (24 Aug 2021), among other Trends Journal articles.
With Goldman’s exit, the SPACs under its wing will have to seek new advisors, throwing into doubt the fate of billions of dollars those SPACs now hold.
The U.S. Securities and Exchange Commission has put forth a wide-ranging proposal for tightening its supervision of SPACs after lawmakers and investors pointed out that SPACs can legally dodge rules imposed on traditional stock offerings, exposing naïve investors to undue risks.
The new regulations place greater liability for any problems on SPACs’ underwriters as well as on the SPACs themselves.
“We are reducing our involvement in the SPAC business in response to the changed regulatory environment,” Goldman spokesperson Maeve DuVally confirmed to Bloomberg.
In many cases, SPACs’ investors were wooed by Goldman and other investment banks, with the promise that a few million dollars invested early could return multiples of that when the SPAC merged.
Investment banks often charged fees of 5 percent across the entire series of transactions, pocketing millions from every SPAC they handled.
Citigroup has paused its work on any new SPACs pending clarity on its legal risks under the new rules, Bloomberg said.
Citigroup was 2021’s largest U.S. underwriter of SPACs, according to Bloomberg.
TRENDPOST: In “IPOs SET RECORD PACE,” (4 May 2021) we noted that SPACs were among the factors artificially inflating market values, in part because they could seduce gullible “investors” with blue-sky tales of wealth to come. When the market began to implode, SPACs—like junk bonds—were among the first asset classes to fall hard.
TREND FORECAST: The market for SPACs will not disappear entirely, but new SPACs will become as rare as they were pre-COVID.
It will take a special SPAC to lure investors to return after the debacle that these vehicles created last year.