By Jessica DiNapoli

NEW YORK (Reuters), Investing banks have made billions from feeding frenzy for blank check companies. And they did so largely with no risk of any money. They also made hundreds of deals that left investors suffering severe losses.

One of these deals will show you how.

In late 2020, Acies Acquisition Corp tapped into investor demand for blank-check companies – formally known as special purpose acquisition companies, or SPACs – with an initial public offering that raised $215 million. Among the investment banks Acies signed up to underwrite the IPO were JPMorgan Chase & Co (NYSE:), Morgan Stanley (NYSE:) and Oppenheimer & Co.

Acies became a shell business after the closing of the offering. Acies had two year to either merge with another private company or return investors the funds it received from the stock exchange listing. Acies’ management team announced it was on the hunt for a business in the “experiential entertainment industry.”

The team didn’t have to look for very long. Playstudios Inc was closed hours after it had been completed. Acies management received a call from bankers advising Playstudios Inc to inform them that the Las Vegas-based manufacturer of mobile casino games was up for sale. They were with JPMorgan. They announced plans to merge Playstudios in 2021. The company’s value was $1.1 billion.

In the run-up to the merger and the listing of the combined company’s shares, Playstudios touted a rosy future. The company forecasted that the combination of surging ad revenues, new role-playing games and cross-marketing offers to players would lead to a 20% growth in revenue for 2021 as well as a 33% increase this year.

The company abandoned the game and revenues fell below expectations. The consequences were devastating for retail investors. Since shareholders approved the merger in June, more than half of the stock has fallen.

“Playstudios is one that looks like crap right now,” Dan Ushman, a 37-year-old Chicago-area entrepreneur, said earlier this year. Acies lost more than 35% of his $26,000 investment after Acies had announced the deal with Playstudios.

Based on a Reuters review, the investment banks that participated in this deal did much better than expected, as they had not taken any risk with their money.

JPMorgan, in particular, pocketed hefty fees for its dual role as an underwriter for the Acies IPO and as an adviser to Playstudios – perfectly legal, despite the apparent conflict of interest, if the bank discloses its role, as JPMorgan did.

Although the bank did not disclose its fees, financial data provider Refinitiv estimated that JPMorgan made $4.7 million from underwriting fees and $14.2million as a seller-side advisor. According to Morningstar Inc, Reuters analysis and financial research firm Morningstar Inc, JPMorgan also earned $1.6 million in support of Acies raising additional capital via a technique called private investment, public equity (or PIPE). PIPEs tap large institutional investors and are sometimes necessary for closing a SPAC merger.

According to Refinitiv estimates, Morgan Stanley received $5.9 million while Oppenheimer got $1.2million in underwriting fees. Morningstar analysis and Reuters analyses show that each bank received $1.6 million in PIPE fees. Refinitiv estimates that LionTree Advisors was another Playstudios advisor earned $6.2million on the deal. This includes $1.6 million in PIPE-related fees according to Morningstar analysis.

JP Morgan and Morgan Stanley declined to comment. Oppenheimer spokesmen said that they played a minimal role in Acies’ IPO.

Playstudios pointed out that Acies and the JPMorgan team it worked with were from different divisions within the bank. The company said it has “a robust framework for evaluating, approving, executing and optimizing its game initiatives,” and that it is continually “revisiting the conditions and decision to either advance or suspend an initiative.”

A CURIOUS PATTERN

The disparate outcomes of the Acies-Playstudios deal – big bucks for the investment banks that sold it and big losses for retail investors who bought into it – are typical of many SPAC deals.

For this article, Reuters analyzed hundreds of SPACs spanning roughly two years, reviewed banks’ internal documents and regulatory filings, and interviewed more than two dozen bankers, investors, SPAC managers, lawyers and corporate executives. It was found that the investment banks fueled to their advantage what proved to be a speculative boom in companies that often fail to live up their pre-listing hype.

In spite of grim market conditions, the SPAC market is in decline since some prominent blank-check listing collapses. The U.S. Securities and Exchange Commission, (SEC), proposed rules in March that would have increased disclosure requirements and possible legal liability for SPACs and banks. Faced with these regulatory and market problems, banks have begun to pull back.

Whatever the outcome of the SPAC market’s future, the Reuters investigation reveals how Wall Street banks, in spite of not having the financial safeguards or legal protections that traditional IPOs offer, have benefited from aggressively promoting deals over the last couple years.

Credit Suisse summed it up last year in a confidential client presentation reviewed by Reuters: SPACs “bend the rules” of the IPO market. A Reuters analysis of SPAC Research data shows that the Swiss bank was involved in 136 blank-check transactions from the beginning of 2020 to the end of March.

A Credit Suisse spokesperson said the language in the presentation pertains to SPAC “market conventions” that give companies and investors more flexibility than in traditional IPOs. The bank is committed to “recommending strategies that conform to all applicable rules,” the spokesperson said.

Underwriters in traditional IPOs could be held liable under securities law for misleading projections and forecasts. Banks do extensive due diligence when reviewing IPOs that they are underwriting. These companies rarely release public projections or forecasts regarding their performance. Banks also buy big chunks of an issuing company’s new shares, risking losses if they can’t resell the stock for more than they paid.

A SPAC is a bank that acts as an underwriter for a blank-check company. However, the bank only receives a percentage of the fee after it has completed its IPO. By the time the SPAC announces a merger, SPAC underwriters aren’t responsible for forecasts and other claims about the performance of the company to be acquired and publicly listed. Blank-check IPOs, which are usually priced at $10 per share, don’t pose a risk for banks selling shares that lose value.

For investment banks, blank-check deals create “moral hazard” – an incentive to take on risk because of little exposure to it – according to Usha Rodrigues, a law professor at the University of Georgia who studies SPACs. That’s because they “don’t have the same liability with a SPAC that they have with a traditional IPO, but banks do get to collect fees if they can get a deal done,” she said. The “companies that merged with SPACs … don’t have the same level of vetting,” which most retail investors do not realize.

According to Jay Ritter (a University of Florida professor of finance), shares of SPAC-merger companies fell by 36% between when they closed and the time that their stock markets were listed. That’s even worse than the 14% decline in shares of companies that went public through traditional IPOs during the same period, according to Nasdaq Inc. All told, according to Vanda (NASDAQ:) Research, retail investors lost $4.8 billion, or 23%, of the aggregate $21.3 billion they plowed into SPACs from the beginning of 2020 to the first week of April 2022.

However, the transactions that have brought these shares to market are a boon for banks. Coalition Greenwich, an industry tracker, estimates that the banks received about $8 billion in SPAC fees between 2020 and 2021. Coalition Greenwich estimates that this figure represents 6.5% of the total U.S. investment bank fees major banks received during that time.

“The bank has an incentive to push the deal to get closed, at any price, because they want their 3.5% of the SPAC IPO proceeds,” said Mike Stegemoller, a professor of banking and finance at Baylor University, referring to the fees underwriters receive only after a SPAC merger closes. “I think the conflict is with retail investors who are buying common shares of stock … Do you really think banks care about these retail investors? I think there are good incentives not to.”

Many banks increased their profits by working both for the deal and taking on more, like JPMorgan with Acies. Reuters identified approximately 50 of these cases between early 2020 and November 2021.

SOURED TENSION

The debate about who is responsible for the investor losses in the SPAC bubble deflated has shifted to the executive of blank-check businesses. These founding investors – referred to as sponsors – risk losing all of their investment if they can’t find a company to take public through a merger within the two-year window.

However, founders acquire their shares at deep discounts to the typical $10 offering price, thanks to preferential treatment and fees that can dilute retail investors’ holdings. Hedge funds and institutional investors who make up a large portion of SPAC’s capital often acquire their shares through an IPO, or subsequent PIPE on favorable terms. This gives them an edge over retail investors.

SPACs were put on notice by the SEC last year. They took several actions against certain companies and sponsors who allegedly misled investors about prospects. In late March, SEC announced the proposed rules. These would include a provision that SPAC underwriters can be legally held responsible for misleading or false forecasts and statements regarding blank-check transactions. After the close of the public comment period, the SEC will vote to approve the rules.

SEC did not comment. In a March 30 statement on the proposed rules, SEC Chair Gary Gensler said “gatekeepers” such as underwriters “should have to stand behind and be responsible for basic aspects of their work” and “provide an essential function to police fraud and ensure the accuracy of disclosure to investors.”

In its proposed rules, the SEC said that the fees underwriting banks receive when a SPAC closes a deal could indicate participation in the merger, and that banks also have a “strong financial interest” in making sure a SPAC inks a deal. For these reasons, the regulator said, it is proposing increasing banks’ liability.

According to a Reuters analysis, which looked at a public database that was maintained by Stanford Law School’s attorney Kevin LaCroix and followed the cases, no investors sought to hold Wall Street banks accountable for misleading or false information allegedly in 47 SPAC-related shareholder lawsuits. These cases were not successful in court.

Undisclosed deals between SPACs and targets prior to a merger announcement have been a subject of regulatory scrutiny. That’s because investors could be misled if a SPAC privately shakes hands with an acquisition target while publicly stating it is still seeking the best possible merger partner.

An SEC investigation into communications between SPACs and their acquisition targets is part of an SEC probe of the $1.25 Billion deal that former US President Donald Trump announced in October to list his social media company on the stock exchange.

In a December filing, Digital World Acquisition Corp, the SPAC that is merging with the former president’s Trump Media & Technology Group, disclosed that the SEC had asked for documents relating to communications between Digital World and Trump Media and meetings of Digital World’s board, among other things. Digital World stated that the SEC did not conclude that any person had violated the law by requesting documents.

Trump Media launched Truth Social in a disappointing failure.

Trump Media, Digital World Acquisition Corp and did not reply to our requests for comment. The SEC refused to comment.

The Acies-Playstudios transaction raises questions about whether these companies had previously planned a merger, which could have prevented investors from getting better deals.

Acies informed investors that when its IPO was launched, it hadn’t identified a company it wanted to merge with but that it would seek the best possible opportunity. As disclosed in a securities filing, Andrew Pascal (chief executive officer at Playstudios) co-founded Acies along with Jim Murren who was the chief executive of MGM Resorts Inc (NYSE:) Inc) when Playstudios was acquired by that casino operator.

Playstudios said it “considered all viable SPAC proposals and eventually made the decision it believed was the best of the available options for the company.” Responding to Reuters inquiries on behalf of Murren and Pascal, Playstudios noted that MGM Resorts, not Murren personally, invested in the company, and that Pascal recused himself from “all Acies deliberations concerning Playstudios” once talks began and “forfeited his economic interest in Acies to avoid even the appearance of having conflicting interests.”

BACKWATER TO BONANZA

SPACs had been an important part of Wall Street’s backwater for many decades. These SPACs connected speculators to companies without other options of public trading. That changed in late 2019 and early 2020, when shares of Richard Branson’s spaceflight provider Virgin Galactic Holdings (NYSE:) Inc and sports betting operator DraftKings (NASDAQ:) Inc surged more than 600% after going public through SPAC mergers. While investors stayed home due to the COVID-19 pandemic, they were able to access cash via government stimulus payments which helped them drive these gains.

Wall Street banks were open to the idea and started aggressively marketing the company. When reviewing documents and client presentations from Reuters, the banks repeatedly acknowledged SPAC’s bad reputation and claimed that they could bring high-quality companies to market with blank check deals.

In a 2020 presentation, Morgan Stanley said there was a “historical perception of lower quality companies picking (the) SPAC route, although views have improved somewhat.” For its part, Morgan Stanley said it associated “only with the highest quality partners.”

Acies is one of its former partners. Acies brought Playstudios on the market. According to Reuters, shares of 51 companies Morgan Stanley helped to take public via SPACs were 28% lower through March. This was either because Morgan Stanley was an advisor or raising funds to close the deal.

Morgan Stanley did not comment on Morgan Stanley’s presentation or performance of the shares held by companies that were made public via its SPACs.

Citigroup (NYSE:), in a 2019 presentation, said that while SPACs historically had been considered a “four-letter” word, synonymous with poor outcomes, that perception was changing as investors’ appetite for new alternatives grew.

A Reuters analysis of SPAC Research data showed that companies Citi has helped to bring to market by helping to raise money or as advisers were 38% lower than the average for May.

Citi participated in the underwriting of Spartan Acquisition Corp II’s IPO and was also an advisor to Sunlight Financial Holdings Inc Inc, which is a financial institution that finances solar energy systems. The bank helped Spartan determine its valuation of Sunlight at $1.3 billion, based on Sunlight’s own profit estimates, securities filings show.

Sunlight then slashed its profit expectations. After peaking at $14.33 early in 2021, the shares now trade at $5.

Citi and Sunlight refused to comment.

Credit Suisse, in a fourth-quarter 2020 presentation to corporate clients, pointed out that the latitude companies enjoy when issuing business forecasts in SPAC deals can “help improve investor perception of the company.” That would be particularly helpful, it said, for companies that “may have struggled to go public via a traditional IPO.”

In the same presentation, Credit Suisse highlighted the “creative marketing tactics” it used in the Virgin Galactic deal. These included flying investors and analysts to tour Virgin Galactic’s factory and Spaceport America complex, which the bank said added “a ‘wow’ factor that a regular-way IPO process could not have provided.”

When Virgin Galactic went public, it wasn’t generating any revenue. The shares rose to $62.80 in just a few months. They plummeted after product testing delays and now trade below $10

In a 2021 presentation, Credit Suisse asserted that the surge in blank-check deals was being driven by “high quality sponsors” that “seek to partner with blue-chip assets.” Quality aside, share prices of the 56 companies Credit Suisse helped bring to market through SPACs in the past two years were down on average about 32% at the end of March, according to a Reuters analysis of data from SPAC Research.

A Credit Suisse spokesperson said the bank is “very selective when it comes to choosing SPAC clients,” and that it treats SPAC mergers “much the same way as regular IPOs” in terms of the bank’s internal approval process. When working for a company that could merge with a SPAC, the bank evaluates alternatives and helps identify the “most suitable course of action,” regardless of whether Credit Suisse underwrote the blank-check firm’s IPO, the spokesperson said.

Virgin Galactic refused to comment.

Paysafe Ltd. is another company Credit Suisse brought to market. A merger of Paysafe Ltd. and a SPAC resulted in the online payments platform being valued at $9Billion. Credit Suisse had underwritten the SPAC’s IPO and acted as an adviser to Paysafe on the subsequent merger.

The $9 billion valuation was based in part on Paysafe’s forecast that its digital wallets business would see double-digit growth from 2020 to 2023. According to Securities filings, banks participated in the discussions for establishing this valuation.

Paysafe became public and had to sell its digital wallets business. These shares have fallen more than 80% over their peak January 2021.

Paysafe decided to go public through a SPAC because it was the “best route to take to public markets,” and hired Credit Suisse because it had worked with the bank on prior deals, according to a company spokesperson. Paysafe has put in place a turnaround plan for its digital wallets business that is “well underway” to “deliver on a new growth trajectory,” the spokesperson said.

Foley Trasimene Acquisition Corp II (the SPAC that purchased Paysafe) declined to comment.

WAITING IN THE WINDGS

CarLotz Inc’s public sale of its car retailer CarLotz Inc demonstrates the aggressive strategies banks used in their pursuit for SPACs.

According to a source, the Richmond-based consignment company that sells used vehicles online through retail outlets began searching for a buyer in late 2019. However, it failed to locate one at the $1B price it desired.

It was several months later. Deutsche Bank (ETR) claimed that it was a sell side adviser for CarLotz. According to one person, the bank also promised to locate a SPAC buyer. Based on Shift Technologies’ recent SPAC merger payment of $730M, CarLotz was valued at $750m. A source close to the matter suggested that the bank wanted SPAC buyers.

Deutsche Bank was already waiting for a bidder, Acamar Partners Acquisition Corp, which had been Acamar’s underwriter since its inception more than a decade earlier. The blank-check firm knew that it had no time to merge. Acamar received a suggestion from Deutsche Bank less than one month following CarLotz’s hiring of Deutsche Bank. According to regulatory filings.

Acamar offered $827 million to win, which was less than CarLotz had expected, but beat out two other bidders according to filings.

CarLotz began wooing investors in anticipation of the stock exchange listing. The company projected that it would be selling almost $1 billion by 2022. This is nearly nine times the revenue from 2020. It said it could satisfy demand from diverse suppliers of used cars, including corporate fleets.

About seven months later, a supplier representing more than 60% of CarLotz’s cars sold in the prior quarter paused its relationship with the company. Sales dried up. The revenue for 2021 was only $259 Million

CarLotz shares have fallen more than 90% in the nine months since their listing, which gives them a market capitalization of just $100 million.

Deutsche Bank did far better. According to Refinitiv estimates, it received $14.1 million in adviser fees and $6.7 million underwriter fees.

Acamar and CarLotz did not respond when asked for comment.

Eric Hackel from Deutsche Bank’s equity origination services declined to speak on CarLotz. In general, he said, the bank’s due diligence for a traditional IPO is “a little bit more thorough” than for a SPAC, but it does “a tremendous amount of diligence on companies we underwrite.”

On deals for which the bank is advising the private company and has also underwritten the SPAC acquiring it, “there’s usually another bank advising,” Hackel said. Ultimately, he said, “it’s up to the company” if they hire the same bank that underwrote the SPAC to advise them on a deal.

He noted that retail investors enjoy some of the protections institutional investors have – such as the right to redeem shares for $10 before a deal closes. However, once a deal is done, Hackel said, retail investors “have to make their own decisions. They have to do their own diligence.”

Kyle Brown (30 years old) is an accountant from Groton, Connecticut who invested in CarLotz. “We lost the totality of our investment with the exception of $35,” he said. “It was about $11,000, $12,000.” Brown had hoped his investment would help pay for a new house, but he ended up having to find other ways to fund a down payment.