The US Securities and Exchange Commission (SEC) has commenced an inquiry into the SPAC frenzy on Wall Street, seeking information on how underwriters manage the risks involved.

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Sources with direct knowledge of the matter told Reuters that SEC has sent letters to banks seeking information on their SPAC dealings. The letters, sent by the enforcement division of the SEC, suggest it may be a precursor to a formal investigation.

SPACs or special purpose acquisition companies are blank check firms that allow investors to back sponsors that then hunt for a private entity to take public. The "SPAC boom" has raised more than $80 billion this year — over 20 times more than this point of last year.

In 2020-21, these black check companies became a red-hot asset, after being recessive for years following the global financial crisis. This boom was fueled partly by easy monetary conditions and partly by its structural design that allows companies to go public with less regulatory scrutiny. While this rally did cool down at the beginning of March, it could not escape the eye of regulators.

Earlier, SEC had issued warnings against SPACs backed by celebrities, urging investors to think before jumping blindly. It had posted an alert on its website saying celebrity endorsement does not make the SPAC appropriate for all investors.

"Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” the agency said.

Now SEC is more interested in figuring out what controls banks have in place to police these SPAC deals internally.

(Edited by : Jomy)

First Published:Mar 25, 2021 3:34 PM IST