Citi to pause new Spac issuance as US signals crackdown: Sources

NEW YORK (BLOOMBERG) - Citigroup is among underwriters that have temporarily paused initial public offerings (IPOs) of new US special purpose acquisition companies (Spacs) until they get more clarity on potential legal risks posed by recently proposed rules, according to people with knowledge of the matter.

The bank is awaiting feedback from legal advisers regarding underwriter liability, among other topics, said the people.

The firm has no plans to exit the business, some of the people said.

Last week, the Securities and Exchange Commission (SEC) issued a sweeping plan for tightening oversight of Spacs after US lawmakers and investor advocates argued that the listings were bypassing rules imposed on traditional IPOs and exposing retail shareholders to risks.

The SEC's proposal would broadly require Spacs to disclose more information about potential conflicts of interest and make it easier for investors to sue over false projections.

A Citigroup spokesman declined to comment.

Citigroup is among the United States' most prolific Spac underwriters, ranking second in 2020 and first in 2021. Over the two-year period, it raised US$31.6 billion (S$43 billion) from 146 IPOs.

This year, issuance has slowed as Spacs have fallen out of favour with investors, in part due to lackluster returns following the consummation of a transaction.

Still, Citigroup is ranked second behind Cantor Fitzgerald, having raised US$1.1 billion from five deals, including US$750 million for former MGM chairman Harry Sloan's Screaming Eagle Acquisition, according to data compiled by Bloomberg.

In its proposal, the SEC deemed the underwriters of a Spac IPO to also be underwriters of the blank-cheque company's subsequent purchase of another firm, a deal known as the de-Spac transaction.

"Underwriters play a critical role in the securities offering process as gatekeepers to the public markets," the SEC wrote. The proposed rule should "should better motivate Spac underwriters to exercise the care necessary to ensure the accuracy of the disclosure in these transactions", the watchdog added.

The expansion of underwriter liability to include de-Spacs may lead to changes in the practices of investment banks "given the heightened risks", lawyers from Sidley Austin LLP wrote in a memo to clients.

"Investment banks involved with de-Spac transactions do not typically conduct the same level of due diligence as they would for a traditional IPO," the lawyers said.