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SEC raises a red flag on celebrity SPACs

Wall Street's hot trend SPAC a mainstream IPO alternative: friend or foe?
posted onMarch 15, 2021
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As the special purpose acquisition companies (SPAC) market  is exploding in popularity, the US Securities and Exchange Commission (SEC) on Wednesday (March 10) issued a warning against SPACs backed by celebrities, urging investors to think twice before jumping on the bandwagon. 

Otherwise known as a blank check company, a SPAC is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering  (IPO) process.  In simple terms, a SPAC offer firms a shortcut to a public listing. They’re also touted for democratizing markets by allowing retail investors access to high-growth companies that they could not have attained through venture capital or private equity funds. 

Last year in America roughly 250 special-purpose vehicles were launched, raising $83bn. Issuance continues at its record pace this year with more than $77 billion raised in the first quarter of 2021 alone, according to SPAC Research. 

SPAC sponsors include an mix of celebrities, from movie stars to professional athletes. Retail investors, too, are piling in: they accounted for 46% of trading in SPACs on Bank of America’s platform in January, as opposed to 30% the month before. Now, the mania is spreading to Europe, where Amsterdam is the hotbed of activity, according to The Economist.

“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 Commission said in an investor alert.

“Lately, we’re seeing more and more evidence on the risk side of the equation for SPACs,” SEC Acting Chair Allison Herren Lee said at the online meeting of the SEC Investor Advisory Committee on Thursday (March 11). “As the volume of SPACs reaches unprecedented levels, the staff is taking a close look at the structural and disclosure issues surrounding these business combinations.” 

The SEC said investors should always do their own research  before investing in SPACs because these deals are considered riskier than traditional IPOs. “For example, sponsors may have conflicts of interest so their economic interests in the SPAC may differ from shareholders,” the alert states. 

SEC tips:

  • Check out the background, including registration or license status, of anyone recommending a SPAC
  • 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 
  • 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.

The boom in SPACs has some analysts and economists concerned. But others praise SPACS arguing  the criticism is misplaced because they are a cheaper and more efficient way to bring companies public. The debate is on.