Special Purpose Vehicles: SPACs are increasingly targeted by drainage supervision authorities

The US Securities and Exchange Commission is increasingly targeting burgeoning, but often opaque special-purpose vehicles (SPACs). Donald Trump’s company also has to answer the questions.

In the United States, the number of initial public offerings rose to a record high this year. By the end of October, 799 preliminary listings had already been counted – more than at any time in an entire year. The boom is being fed by purpose-built companies that do not have their own businesses but act as vehicles for other companies, the so-called SPACs. Nearly three-quarters of all Wall Street IPOs in New York this year will be made up of SPAC, experts estimate. The companies earned more than $200 billion in the process.

SPAC stands for “Special Purpose Acquisition Company,” as German stock exchange regulator BaFin puts it. These are empty shell companies that have no operational activity, the sole purpose of which is to raise capital from investors through an IPO.

Basically, BaFin sees SPACs as another way to help companies raise capital. Deals like this can be especially interesting for startups. Because the normal underwriting is usually associated with some effort and costs incurred by the company. In Europe, the Amsterdam and London stock exchanges in particular are promoting SPACs.

Investors buy ‘pig in a poke’

But the huge popularity of these special-purpose vehicles is increasingly becoming a thorn in the side of the SEC. It complains of a high risk to investors and a lack of transparency. SPAC investors usually do not know in advance which company to list on the stock exchange. So you’re buying a “pig in a poke”. It also happens that the SPAC IPO fails because investors jumped in at the last minute.

Moderators have also criticized the fact that actors, athletes, and other public figures advertise SPACs – and thus about topics they are not familiar with. Many investors don’t realize that these so-called sponsors are paid more than “regular” shareholders.

Trump SPAC is also in her sight

Now Donald Trump is also being targeted by the Securities and Exchange Commission. The agency is examining SPAC, which Trump wants to use to list his social network on the stock exchange. The company called Digital World Acquisition (DWAC) announced that it has received a request for information from the SEC. The regulator is requesting information about contacts with Trump Corporation and is considering stock trading in DWAC prior to announcing the listing of Trump Media and Technology Group (TMTG) on the stock exchange.

At the end of the week, the two companies announced that they had found financially strong investors for Trump’s planned online network called Truth Social, which will be run by TMTG. So far, unnamed donors are said to give $1 billion.

Patrick Orlando, a former investment banker for Deutsche Bank, is behind the DWAC. DWAC has raised $293 million to be available for the new Trump Network. DWAC shares were valued at $10 in the original deal with Trump Media in October. Yesterday they were trading at $42.60. Trump’s Twitter rival is scheduled to launch in the first quarter of 2022.