SEC Cautions the Public on SPACs and Celebrity Endorsements

The Securities and Exchange Commission has issued a warning on SPACs and “celebrity involvement.” Emanating from the SEC’s Office of Investor Education and Advocacy (OIEA)  the agency cautions investors not to invest in SPACs based solely on celebrity involvement.

To quote the SEC:

“Celebrities, from movie stars to professional athletes, can be found on TV, radio, and social media endorsing a wide variety of products and services.  Sometimes they are even involved in investment opportunities such as special purpose acquisition companies, or SPACs, as sponsors or investors.  Those celebrities may even be well-known professional investors.  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.”

SPACs are a hot sector of the capital markets and are more akin to publicly-traded VC investments. Many SPACs target private companies that are experiencing rapid growth and may be considering an IPO otherwise.

A SPAC or special acquisition company (also blank check firm) enables an issuer to become public, raising capital, for a future merger or acquisition. The disclosure information is not quite as extensive, although just as rigorous as a run-of-the-mill IPO, as the operational aspects of the company do not yet exist. SPACs had a big year in 2020 and are expected to experience an even more robust 2021. Last year there were 248 SPACs and that number will be easily topped and perhaps doubled.

In regards to celebrity endorsements, it is not clear as to which SPAC the SEC is wagging its finger at but there have been several that have gone the celebrity touting path. Some observers see celebrity endorsements of securities as more of a warning sign than a positive signal.

 

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