John Coates, a top official from the US Securities and Exchange Commission (SEC), has warned that the Special Purpose Acquisition Companies (SPACs) have some “significant and yet undiscovered” issues.

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SPAC listings bypass some safeguards that traditional IPOs offer which they make up for by offering big rewards.

These issues are not going to stop them by any means, said Coates, the director of the SEC’s Corporate Finance division. But, “They are relatively as yet incompletely worked through mechanisms, despite the fact they have been around for a while,” he said.

SPACs have raised nearly $100 billion YTD, with over 300 listed blank-check firms.

SPACs, or blank-check firms, are shell corporations designed to take companies public without taking the traditional IPO route. A listed SPAC targets and merges with a private firm, and takes it public.

Being recessive after the global financial crisis, SPACs became a red-hot investment asset in 2020. From celebrities to hedge funds, nearly 250 companies raised over $80 billion in the US in 2020. Several analysts had slated this precipitous surge in interest to speculation.

The rally cooled down in the beginning of March. The SPAC index has fallen over 20 percent from its February high. However, it could not escape the regulator’s eye.

Late in March, SEC commenced an inquiry into the SPAC frenzy. The regulator was seeking information on how underwriters manage the risks involved.

Coates said Wednesday that the agency is to issue more comments about the market in the coming weeks.

The regulator’s focus on SPACs is expected to increase now that the administration has changed. While Trump favoured all forms of public offerings, Democrats are expected to scrutinize deals closely.