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Mortgage upstart Better’s plan to go public via a SPAC merger faces new challenges as regulators investigate potential violations of federal securities laws and the banks that were advising the companies on the deal resign from their roles.
The U.S. Securities and Exchange Commission is looking into issues including related-party transactions and allegations made in litigation filed by Sarah Pierce, Better’s former head of sales and operations, according to a regulatory filing Thursday.
Better and Aurora Acquisition Corp., the special purpose acquisition company (SPAC) formed to take Better public, say they’re cooperating with the voluntary investigation. But the companies also acknowledged that they’re exploring the possibility of abandoning their attempt to take Better public.
During the second quarter — sometime between April 1 and June 30 — Better and Aurora received requests for documents from the SEC’s enforcement division, which “is conducting an investigation relating to Better to determine if violations of the federal securities laws have occurred,” Aurora revealed in the latest version of the merger prospectus.
The requests cover “certain aspects of Better’s business and operations, certain matters relating to certain actions and circumstances of the Better Founder and CEO and his other business activities,” and allegations made by Pierce.
“Better and Aurora are cooperating with the SEC,” the company said. “As the investigation is ongoing, neither Better nor Aurora are able to predict how long it will continue or whether, at its conclusion, the SEC will bring an enforcement action against either of them and, if it does, what remedies it may seek. Regardless of the outcome, this investigation could impose a significant cost and divert resources and the attention of members of our executive management from our business.”
A person familiar with the company’s inner workings suggested the inquiry was part of added scrutiny faced by companies looking to go public.
“We remain very confident in the accuracy of our financial statements and other disclosures,” the source said.
Further complicating matters for the prospects of Better’s SPAC merger, the banks that were serving as financial advisers to Aurora and Better have resigned from their roles, according to the filing.
Barclays, which was advising Aurora, resigned from its role on June 22, the companies said. Better’s adviser, Citigroup, resigned on June 23.
“Neither Barclays nor Citigroup provided a reason for its resignation and neither Aurora nor Better will speculate as to their motivations for resigning their respective roles,” the prospectus said.
The banks didn’t immediately respond to a request for comment.
Barclays and Citigroup waived $16 million in fees they would be owed upon completion of the merger, with Barclays giving up $8.5 million and Citigroup $7.5 million. Although not formally retained by Better, Bank of America also “indicated it is resigning from any role it had,” Aurora disclosed.
With a Sept. 30 deadline to complete the merger looming, the SEC investigation and the resignations of Barclays and Citigroup could give investors cold feet, the companies acknowledged.
According to the prospectus, 30.1 percent of the issued and outstanding Aurora shares are committed to vote in favor of the merger, which means approximately 20 percent of the remaining Aurora common shares will be required for the deal to go through.
But the SEC must complete its review process and declare the merger registration statement effective before shareholders can vote, and “there can be no assurance that such registration statement will be declared effective in sufficient time to permit the extraordinary general meeting to occur prior to the agreement end date,” the companies said.
Because Barclays and Citigroup had largely completed their financial advisory services, “Aurora and Better do not believe that these resignations will delay Better’s entry into the public market and neither Aurora nor Better expects to hire any other financial advisors in connection with the business combination,” the companies said.
The source familiar with the Better’s inner workings suggested the banks were responding to recent new rules for underwriters created by the SEC.
But the resignations could damage the merger’s prospects, “If market perception of the business combination is negatively impacted, an increased number of Aurora shareholders may vote against the proposed business combination or seek to redeem their shares for cash,” the companies warned.
Although Aurora and Better “remain committed to completing the business combination,” the companies said they “have had preliminary conversations about potential structures where the business combination would be terminated and Better would remain a private company.”
In addition to withdrawing as Aurora’s financial adviser, Barclays is stepping back from funding mortgages originated by Better, according to the filing.
“A number of Barclays’ trading and warehouse lending lines have been paused pending a re-evaluation of its broader relationship with Better,” the companies said.
The latest prospectus also revealed that during the second quarter, Aurora entered into an agreement to acquire an unnamed financial institution in Britain, where Aurora is based.
“The completion of the acquisition of the United Kingdom banking entity is subject to the approval of the Prudential Authority and the Financial Control Authority,” the company said.
After ballooning to more than 10,000 employees in December 2021, Better has shed 72 percent of its staff over a six-month period. As of May 15, the company has shrunk to 2,900 employees.
In a press release, the companies said they were continuing the process to become a publicly-listed company, and that closing the merger would unlock $750 million in new capital.
Better would use the proceeds “to continue investing in products and features that customers need now more than ever for a great homeownership financing experience,” the companies said.
Although primarily known as a mortgage lender, Better provides end-to-end services including real estate brokerage and title insurance through subsidiaries Better Real Estate, Better Cover and Better Settlement Services.
In 2021, Better Mortgage funded approximately $58 billion in home loans, Better Real Estate agents were involved in $2 billion in real estate transactions and Better Cover and Better Settlement Services provided over $22 billion in insurance coverage, the companies said.