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Be Wary of Celebrity SPAC Endorsements, SEC Warns

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What You Need to Know

  • Celebrity involvement in a SPAC doesn't mean it's without risk.
  • Sponsors may have conflicts of interest, so their economic interests in the SPAC may differ from shareholders' interests.
  • The SEC tells investors to do their homework before investing in SPACs.

A few months after cautioning investors about investing in a special purpose acquisition company, or SPAC, the Securities and Exchange Commission warned investors Wednesday to be wary of SPACs that have celebrity involvement.

Celebrity involvement in a SPAC — as a sponsor or investor — does not mean that the investment “generally is appropriate” for all investors, the SEC warned in its alert.

“It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” the SEC said. “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.”

Shaquille O’Neal, Former House Speaker Paul Ryan and famed investor Bill Ackman are just a few celebrities promoting SPACs.

SPACs have become a popular vehicle for transitioning a private company to a publicly traded one, the SEC explains.

A SPAC is a blank-check company with no operations that offers securities for cash through an initial public offering. SPACs then have a specified period of time — typically two years — to identify and merge with a private operating company, according to the SEC.

“This business combination is often used as an alternative means of taking the acquired company public, rather than through a traditional IPO,” the SEC stated.

SPAC transactions differ from traditional IPOs, the SEC stated, “and have distinct risks associated with them.”

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For instance, sponsors may have conflicts of interest, so their economic interests in the SPAC may differ from those of shareholders.

Further, “while SPACs often are structured similarly, each SPAC may have its own unique features, and it is important for investors to understand the specific features of any SPAC under consideration,” the SEC warned.

James Angel, associate professor of finance at Georgetown University’s McDonough School of Business, told ThinkAdvisor on Thursday in an email that SPACs “provide a quick way for companies to go public with less restrictions than a typical IPO.”

They’re also “a poor man’s private equity,” Angel continued. “You can get into a future deal run by somebody you hopefully trust, but you don’t have to be a super-wealthy investor with access to the right connections.”

Also, the SPAC “promoters have figured out how to sell them and make lots of money on them,” Angel said. “Usually the promoter gets 20% of the common equity upon completion, which is pretty sweet. The option to back out attracts investors because they have a parachute to bail if they don’t like the deal.”

According to Bloomberg, in 2019, 59 SPACs raised $13.6 billion. In 2020, 248 raised $83.3 billion. So far this year, 226 SPACs have raised almost $73 billion, with SPACs making up more than 70% of the IPO market.

Before investing, the SEC suggests following these three steps:

  • Check out the background, including registration or license status, of anyone recommending a SPAC, using the search tool on Investor.gov.
  • Learn about the SPAC sponsors’ backgrounds, experience and financial incentives, how the SPAC is structured, the securities that are being offered, the risks associated with an investment in the SPAC, plans for a business combination, and other shareholder rights by carefully reading any prospectus that may be available through the SEC’s EDGAR database.
  • Consider the investment’s potential costs, risks and benefits in light of your own investment goals, risk tolerance, investment horizon, net worth, investments and assets, debt and tax considerations.

Pictured: Shaquille O’Neal, who is promoting a SPAC. (Photo: Bloomberg)