SPACs—or special purpose acquisition companies—were once the darlings of Wall Street, but now they’re flailing, contends an article in The New York Times. The function of SPACs is to sell shares to the public and then purchase an operating business with those funds. If they don’t acquire a business within a 2-year window, the money is returned to investors.

Over the past 2 years, investors dropped $250 billion into SPACs, but now—with inflation raging, interest rates rising, and a potential recession looming—those investors are pulling out of SPACs, which is allowed if there is a potential acquisition in the works. Many investors just don’t have the confidence that the merger will actually go through; high-growth companies are seeing their stocks battered, and many SPAC mergers involve riskier companies.

Additionally, dozens of investigations into SPACs have been opened by the SEC, with the potential for stricter regulations on the table. That could make SPAC mergers less profitable for large investment firms that handle the mergers—and those firms have been withdrawing from SPACs as well, according to the article. Since the start of 2022, at least 7 SPACs have closed up shop, 73 have shelved plans to go public, and roughly 600 SPACs that did go public are scrambling to do deals before the window closes.

SPACs have been around for quite a while, but before 2020 they were known for being the only route that a company whose financials wouldn’t pass muster could take in order to go public. But when big-name firms, popular start-ups, and well-known venture capitalists began to embrace them early in 2020, Wall Street soon followed. Shares are generally $10 each, and investors who get in early obtain a security to buy more shares later at a set price, known as a warrant. Those can be lucrative when—and if—the share price increases if the SPAC finds a company to acquire. Hedge funds in particular took a shine to SPACs as they aimed to profit off the difference between a SPAC share price and the warrants they had.

Now, however, soaring inflation and tightening policies from the Fed, along with increased scrutiny of the SPAC market, have taken the bloom off the SPAC rose. More and more investors are using their right to redeem their SPAC shares; whereas 54% of shareholders would invoke this right in the past, now 80% are pulling their money out, leaving the future merged company with much less capital. Even the deals that do go through aren’t guaranteed moneymakers: MSP Recovery finalized its deal with Lionheart Acquisition Corporation II in late May and its shares promptly fell 53%.

The regulations proposed would make it easier to sue a SPAC-merged company if it turns out the financials and earnings capabilities have been exaggerated to shareholders, and banks could also be held liable for being involved in such deals. The potential for that, as well as higher costs and fees that will come as a result of more regulation, is causing some Wall Street banks to now back away from SPACs, the article maintains.

270 of the 600 SPACs still looking for companies to buy have trying for at least a year. That desperation could lead to unsavory deals, according to Nathan Anderson of Hindenburg Research. “The quality of SPACs was never high to begin with,” he told The Times. “And now it has the potential to get substantially worse.”