Ann Arbor Times

Investors have experienced substantial losses when participating in "blank check" companies that acquire private firms to take them public, according to new research from the University of Michigan. The study highlights a need for stronger regulation of private equity, particularly as federal standards are being relaxed and retirement funds face increased exposure to these investments.

Nejat Seyhun, a professor at U-M’s Ross School of Business, compared the current regulatory environment to “appointing the fox to guard the chicken coop.”

The forthcoming study in the Iowa Law Review, co-authored by Seyhun and Cindy Schipani—also from U-M’s Ross School—and Sureyya Burcu Avci of Vanderbilt University, finds that investors lose about 45% of their investment within two years after such transactions. The researchers report that these negative outcomes have become more pronounced over time.

Their concerns follow a federal appeals court decision last year that limited the Securities and Exchange Commission's efforts to increase transparency in the private funds sector. Additionally, President Donald Trump recently signed an executive order expanding pension funds’ access to private equity markets, which further exposes small and retail investors as regulatory standards are loosened.

Schipani and Seyhun sought to assess whether private investments in public equity (PIPEs) offered fair returns for investors. Since PIPE return data is publicly available, they were able to analyze performance directly. Their findings show that firms using PIPE financing faced immediate and significant negative abnormal returns—over 50% just more than a year after the deals were completed.

The researchers argue that high levels of risk, conflicts of interest, costs, and lack of transparency make these investments unsuitable for small or even many accredited individual investors. Schipani noted that these individuals are “financing transactions without the benefit of full and fair disclosures.”

Despite this unsuitability, retail investors gain exposure through mutual funds, pension plans, 401(k)s and other retirement vehicles. As regulations currently allow mutual funds to invest up to 15% of their assets in private funds without requiring investor accreditation.

Special Purpose Acquisition Companies (SPACs), sometimes called “shell” or “blank check” companies, first appeared in the 1990s as a way for private companies to go public outside traditional IPO routes. When a SPAC merges with a private company—a process known as de-SPAC—it allows that firm quick access to public capital markets.

Private firms pursued public listings at unprecedented rates earlier this decade due to what researchers described as “enticing return-on-investment promises.” However, interest waned amid poor investment results and controversies around limited shareholder disclosure rights.

According to the study authors, SPACs have often avoided standard disclosure requirements and anti-fraud rules applicable elsewhere in securities law. This enabled sponsors “to shoehorn shareholders into bad investments.” Even though SPAC activity has slowed since its peak boom period, it remains influential within U.S. securities markets.

To address identified risks, the researchers recommend empowering Congress to give greater regulatory authority over private funds and their advisers to the SEC. At minimum, they say disclosure rules should be reinstated as originally planned.

Seyhun stated: “The private equity industry, which is high cost, risky, opaque and rife with massive conflicts—yet at the same time massively profitable for its sponsors—is now salivating over $44 trillion retirement savings,” he said. “In our paper we show the dangers of an unregulated private equity juggernaut getting access to unsophisticated retail investors’ savings.”

Schipani added: “They should demand to know where their money is going.”