SPACs: SEC Warns of Celebrity Endorsements

Rick Steves

“SPAC sponsors generally acquire equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market. As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combination and may have an incentive to complete a transaction on terms that may be less favorable to you.”

The SEC, through its Office of Investor Education and Advocacy (OIEA), has warned investors amid the growing trend of celebrity endorsements of special purpose acquisition companies (SPACs).

“Celebrities, from movie stars to professional athletes, can be found on TV, radio, and social media endorsing a wide variety of products and services”. These include investment opportunities such as SPACs.

“However, celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors. Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. 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 regulator said.

A SPAC is a blank check company with no operations that offers securities for cash through an initial public offering (IPO). SPACs have become a popular vehicle for transitioning a private company to a publicly-traded and is used as an alternative to a traditional IPO.

The SEC explained the different risks from traditional IPOs. “For example, sponsors may have conflicts of interest so their economic interests in the SPAC may differ from shareholders. Investors should carefully consider these risks. In addition, 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”.

“SPAC sponsors generally acquire equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market. As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combination and may have an incentive to complete a transaction on terms that may be less favorable to you. To learn more, see our Investor Bulletin”, said the statement.

The regulator advised the public to first follow these three stops before investing in SPACs:

  • 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 which 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, existing investments and assets, debt, and tax considerations.

Listed markets are taking a very interesting direction in that stock pertaining to SPAC (Special Purchase Acquisition Company) entities are a massive focus. The stock market is becoming the prominent area of interest across the entire trading spectrum from wealth managers to hedge funds and down to retail traders.

Venues have been for years trying to get the professional OTC traders back onto exchanges, hence those high-value acquisitions and initiatives by global executing venues in this direction over the years.

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