Anxiety is growing that the wellspring of special-purpose acquisition companies, a 2020s echo of the dot-com mania of the 1990s, is bumping up against the limits of both Wall Street and Washington.
The pipeline of SPACs rushing to market is getting so clogged that bankers, lawyers and auditors are turning away business as they struggle to keep pace, according to people familiar with the matter. As founders of blank-check companies wait in line, the deep-pocketed investors needed to take them public have grown squeamish.
About 300 SPACs launched this quarter on U.S. exchanges, raising almost $100 billion — more than all of last year.
Yet since the start of last week, four deals have been postponed, and roughly half the SPACs that proceeded are trading below their offering prices. Some financial firms, including Deutsche Bank AG, have slowed new SPAC IPOs, people familiar with the matter said. And in Washington, staff at the Securities and Exchange Commission are said to be contending with a growing pile of incomplete paperwork.
“There was maybe an excess of transactions,” said Anna Pinedo, a capital markets lawyer at Mayer Brown LLP. “That may have raised concerns on the part of investors in terms of having an appropriate opportunity to analyze and vet deals to their satisfaction.”
SPAC veterans have been warning for months that some new entrants may be overvaluing their targets: closely held entities often lacking the proper governance or operational maturity to hold stock offerings of their own. Tech firms still working on their main products, such as aerospace startup Archer Aviation and electric-vehicle maker Lucid Motors, have merged with SPACs and become public companies based not on their revenue but future projections.
Inside the SEC, the regulator’s top brass have been privately expressing concerns that the SPAC mania could eventually hurt retail investors. In recent weeks on Wall Street, talk of heightened regulatory scrutiny and tougher feedback on deals has been sending a chill through the market.
The SEC’s processing of SPAC documentation is taking longer than it previously did. In some cases, agency staff have warned lawyers that it may take a full 30 days to review paperwork and to expect an additional two weeks to hear back on changes or amendments, according to people familiar with the situation.
One problem, another person said, is that more filings are arriving incomplete or containing errors. The agency is also contending with a barrage of phone calls from lawyers asking questions on their deals. To handle the deluge, the SEC expanded the unit that reviews SPAC filings, the people said.
A spokesperson for the SEC declined to comment.
Meanwhile, liability insurance rates for SPACs are skyrocketing. Coverage of about $10 million to indemnify a blank-check company’s directors and officers now costs more than $1 million on average, according to a lawyer who works on SPAC deals. That’s up from $250,000 to $300,000 a year ago.
This isn’t the first time the seemingly insatiable hunger for SPACs has abated. October and November brought IPO fatigue and made it harder for SPACs to raise the additional funds they need to complete acquisitions. Financiers for those injections, known as a private investment in public equity, or PIPE, began writing smaller checks, delaying some transactions. This time, lawyers and bankers say, some deals will fall apart.
“PIPE investors are becoming increasingly discerning,” said Mitchell Presser, a partner at Morrison & Foerster LLP. “In the long run, this will be good for the SPAC market, because strong deals and strong post-announcement trading will drive confidence in SPACs and support continued strength of the marketplace.”