Goldman Sachs halts work on new Spacs after SEC takes tougher stance

Goldman Sachs has halted new Spac offerings, people familiar with the matter said, in another blow to blank-check companies as regulators close in on the once-booming market.

The move marks a setback for the Wall Street investment bank, which last year ranked as the second-biggest underwriter of special-purpose buyout firms, helping backers raise nearly $16 billion, according to Refinitiv data.

Goldman will also stop working with most of the Spacs it helped take public, one of the people added.

Spacs are shell companies that raise money from investors and are listed on the stock market. Its backers then seek a private company to go public through a merger. The vehicles saw a surge in popularity in 2020, but have since attracted regulatory scrutiny.

The US Securities and Exchange Commission in March proposed reforms to the Spac market with the aim of improving transparency and bringing the rules more in line with those of traditional initial public offerings.

The proposal, which is open to public comment, would increase underwriters’ liability by requiring banks working on Spac’s IPOs to also work on the subsequent merger. The banks would also be liable for any misstatements related to the merger.

“We are reducing our share of the Spac business in response to the changed regulatory environment,” Goldman said.

Goldman has been one of the biggest winners of the recent Spac boom, enjoying the lucrative fees that come with working on Spac’s IPOs and subsequent mergers, but has since pulled out as investor interest has cooled and performance has decreased. Bloomberg previously reported that the bank was reducing its stake in Spacs.

Citigroup has also taken a more cautious approach to Spacs by following the proposed rules, a person briefed on the matter said. The group, which in 2021 was the main underwriter of Spac IPOs, has not worked on a new list of blank checks since the proposal was published.

Banks typically receive about 5 percent of Spac’s IPO proceeds as fees, and about 3.5 percent of that is earned once the blank check vehicle has completed its merger with a private company.

The SEC’s proposal considers that the deferred fees demonstrate “a strong financial interest” in the completion of the merger, and therefore the banks should be considered signatories to the agreement and bear any related liability.

“It’s a pretty significant rewrite of historical practice as what qualifies as underwriter liability,” a Spac lawyer said, adding that “banks are very nervous about being considered underwriters.”

The SEC proposal followed last year’s regulatory investigations into the Spac deals.

Lucid Motors, an electric car company that went public through a merger with Churchill Capital Corp IV, has been investigated for disclosures it made when the company was listed.

Digital World Acquisition Corp, a SPAC that took former US President Donald Trump’s entertainment startup Trump Media and Technology Group public, said last December that authorities were investigating information between the two groups.

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