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Investors experience considerable losses when they engage with “blank check” companies that acquire private entities to bring them public—highlighting the urgency for increased regulations on private equity as the Trump administration seeks to ease standards and expose retirement portfolios to heightened risks.

The University of Michigan’s Nejat Seyhun, remarks that the entire environment is “similar to appointing a fox to oversee the henhouse.”

The forthcoming study in the Iowa Law Review, co-authored by Seyhun and Cindy Schipani, professors at U-M’s Ross School of Business, indicates that these investors lose roughly 45% of their investment within two years post-transactions. The authors assert this trend has deteriorated over time.

Their apprehensions are intensified by a federal appeals court decision last year that blocked efforts from the Securities and Exchange Commission to enhance transparency within the private funds sector. Furthermore, President Donald Trump endorsed an executive order earlier this month that broadens pension funds’ access to private equity markets, consequently increasing retail investors’ exposure as regulations are relaxed.

Schipani and Seyhun, who collaborated with Sureyya Burcu Avci, an adjunct lecturer at Vanderbilt University, aimed to assess whether investors are receiving a fair arrangement in these private investments in public equity. They could analyze the performance since PIPE returns are publicly accessible.

Moreover, the researchers discovered that firms utilizing PIPE financing faced immediate, substantial negative abnormal returns. Just over a year after the studied transactions, abnormal returns exceeded 50% (an abnormal return signifies the gap between the actual return of a security and its expected return).

Due to elevated levels of operational and financial risks, conflicts of interest, expenses, and a lack of transparency, the researchers contend that private investments are inappropriate for small retail investors or even numerous accredited individual investors. According to Schipani, these investors are facilitating transactions absent the advantage of complete and equitable disclosures.

Nonetheless, these investments are seeping into retail investors’ portfolios via mutual funds, pension funds, 401(k) plans, and other retirement instruments. As of this year, regulations permit mutual funds to allocate up to 15% of their assets into private funds without necessitating accreditation from individual investors.

These “shell” or “blank check” entities, referred to as Special Purpose Acquisition Companies, surfaced in the 1990s as a means for private firms to attract public funds without undergoing a conventional initial public offering. The procedure of a SPAC acquiring a private firm and going public through the merger is termed a “de-SPAC” transaction.

Private enterprises experienced public listings at unprecedented rates in the early part of the decade as “SPACs provided alluring return-on-investment promises,” the researchers noted in their study. However, their appeal declined due to poor investment outcomes and controversies regarding limited disclosures of shareholder redemption rights and additional concerns.

SPACs, they indicate, have historically evaded standard stock distribution disclosure obligations and anti-fraud measures. This enabled sponsors to “force shareholders into unprofitable investments.”

Despite the decline following the SPAC surge, they continue to play an increasingly significant role in U.S. securities markets.

Among various recommendations, the researchers advocate for Congress to empower the SEC to oversee private funds and their advisors. At the very least, the SEC should be authorized to reinstate disclosure regulations as initially intended.

Seyhun asserts that the research unveils distinct risks linked to the unsuccessful endeavor to establish transparency or accountability within the industry, compounded by Trump’s executive order facilitating private equity investments “for grandparents’ retirement savings.”

“The private equity sector, which is costly, risky, opaque, and riddled with major conflicts—while simultaneously being extremely profitable for its sponsors—is now eyeing $44 trillion in retirement savings,” he stated. “In our paper, we illustrate the perils posed by an unregulated private equity behemoth accessing unrefined retail investors’ savings.”

In the absence of regulation, Schipani advises investors in private equity to demand disclosures regarding conflicts of interest and compensation structures.

“They should require clarity on where their funds are directed,” she stated.

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