# SEC cracks opens probe into blank-check company IPO mania: report

SPACs are shell companies that raise money through initial public offerings, with the aim of using those funds to acquire a privately held company and create a new, publicly traded entity. Companies such as zero-emissions truck maker Nikola
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and sports betting operator DraftKings
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were both born of high-profile SPAC mergers.

The popularity of SPACs has grown in the past year or so, with celebrities such as former baseball star Alex Rodriguez among those jumping aboard. According to SPAC Analytics, there have been 294 such IPOs this year so far, from 59 in 2019.

The SEC raised a yellow flag over the blank-check companies earlier this month via an investor alert that said “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.”

Highlighting risks relative to traditional IPOs, the SEC pointed out that SPAC sponsors typically buy equity in the company at more favorable terms than the public will get.

It is unclear whether any fresh inquiry from the SEC will turn into a formal one. Two of the sources told Reuters that as the banks were asked to voluntarily furnish information, it wasn’t an official probe, but another source said the letters could mark the start of one.

Opinion: This SPAC with ties to NASA plans to make daily runs to space

One sign of “peak SPAC” may be office-space sharing startup WeWork, which reportedly lost $3.2 billion last year, yet is seeking a SPAC listing with a valuation of $9 billion, said Jeffrey Halley, senior market analyst at Oanda, in a note to clients on Thursday.

“You remember, it’s the serviced office company with ping-pong tables that all those clever finance people thought was worth $50 billion less than two years ago,” he said. “30+ years of gnarled existence as a pilot fish in the financial markets has imbued an ‘if it’s too good to be true, it always is’ mind-set on me. SPAC-mania fits that bill nicely.”

Berkshire Hathaway’s
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vice chairman and famed investor Charlie Munger likened SPACs to “crazy speculation,” in comments he made last month.

Some argue that SPACs can make good investments, but it pays to be selective, such as picking those that are sponsored by investors who manage a lot of money or sponsors with solid track records.

Opinion: Why the smartest stock investors are passing on most SPAC IPOs