Analysis: As U.S. watchdog steps up scrutiny, Grab deal signals blank-check party peak

Burgerfi International

14/04/2021 16:20

By Katanga Johnson and Joshua Franklin
    WASHINGTON/NEW YORK, April 14 (Reuters) - While the
blank-check deals market reached new heights this week with Grab
Holdings' record $40 billion merger, some lawyers and regulatory
experts said the exuberance was unlikely to last as the U.S.
securities watchdog steps up scrutiny of such deals. 
    Southeast Asia's largest ride-hailing and food delivery firm
on Tuesday clinched a merger with special purpose acquisition
company, or SPAC, Altimeter Growth Corp, paving the way for a
U.S. listing and the biggest-ever blank-check company deal. 
    The blockbuster merger underscores Wall Street's mania for
the deals in which listed shells take private companies public,
with a record $100 billion raised through initial public
offerings (IPOs) in the United States this year. 
    Amid growing worries the market is in a bubble that will
hurt investors when it bursts, the U.S. Securities and Exchange
Commission (SEC) has been trying to rein-in deals by issuing
public warnings and more closely scrutinizing deal filings. 
    "The SEC seems to be banging every drum and waving every
light it can find to make it clear to investors and companies
that there's a lot of risk in SPACs," said Ty Gellasch, head of
Washington-based think tank Healthy Markets. "It seems like the
SPAC mania is likely to peak very, very soon," he added.
    The latest SEC action came on Monday in the form of new
accounting guidance which suggested warrants issued by SPACs
should be accounted for as liabilities instead of equity
instruments. That will cause a headache for some SPACs that have
to review and re-state their financials. urn:newsml:reuters.com:*:nL4N2M6021
    BurgerFi International Inc., which went public through a
SPAC in December, postponed its earnings on Tuesday, saying it
needed more time to assess the impact of the new SEC guidance. 
    Although it is unlikely to deter companies from going
public, the guidance "validates the concern of some that the SEC
has a persistent hostility towards SPACs," said Douglas
Ellenoff, partner at law firm Ellenoff Grossman & Schole LLP.
    Wall Street's biggest gold rush of recent years, SPACs are
listed shell companies that raise funds to acquire a private
company and take it public, allowing targets to sidestep the
more onerous paperwork and regulatory checks faced by
traditional initial public offerings. 
    The boom has been fueled by easy monetary conditions as
central banks pump cash into pandemic-hit economies, strong
trading debuts, and a preference among start-ups for an easier
and more private route to the public market. 
    Investor advocates have warned for months, however, that
many SPACs are wildly overvalued and that targets may be trying
to evade regulatory scrutiny. That has led the SEC's new
Democratic leadership to begin examining SPAC disclosures for
misleading information and to warn of concerns over deal fees,
conflicts and sponsor compensation. urn:newsml:reuters.com:*:nL1N2M12BM  urn:newsml:reuters.com:*:nL1N2LT3NJ
    Last week, the SEC's acting corporate finance director John
Coates said he wasn't pro or anti SPAC, but that "new issues
with both standard and innovative SPAC structures keep
surfacing." 
    The agency has also opened an inquiry into how Wall Street
underwriters are managing the risks involved, seeking data on
internal controls, and its enforcement unit is probing electric
vehicle makers that went public via SPACs.  urn:newsml:reuters.com:*:nL1N2LM3CH
    "The SEC is trying to be proactive here and not just react
to what is likely to be an inevitable disaster," said Howard
Fischer, a partner with law firm Moses & Singer. "The Grab
announcement shows that regulatory efforts to tamper down
'irrational exuberance' almost always lag behind investment
trends."
    Still, with 434 SPACs boasting nearly $139 billion in cash
looking for targets, according to information provider SPAC
Research, lawyers were skeptical that the SEC's recent efforts
would deflate the market in the near-term. 
    Alan Annex, co-chair of Greenberg Traurig's global corporate
practice, said the accounting changes were an easy fix for new
SPACs and companies were still looking for deals.
    "Within the next two weeks this accounting change will all
be sorted."

 (Reporting by Katanga Johnson and Joshua Franklin; Writing by
Michelle Price; Editing by Andrea Ricci)
 ((michelle.price@thomsonreuters.com; +12026041711; Twitter:
@michelleprice36;))