Celebrities are jumping into the SPAC boom and so are retail investors. And now the U.S. Securities and Exchange Commission (SEC) notifies investors not to invest in special-purpose acquisition companies (SPACs) just because a celebrity is involved.
The regulator on Wednesday (March 10) issued a warning against SPACs backed by celebrities, who are just as vulnerable as anyone else to be lured into participating in a risky investment.
“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 agency said in an investor alert.
Also know as a blank check company, a SPAC is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. SPACs have been around for decades but have become more common in recent years, with their IPO fundraising hitting a record $13.6 billion in 2019. Last year in America roughly 250 SPACs were launched, raising $83bn. This year so far, more than $77 billion have been raised according to SPAC Research.
The SEC also hosted a panel on Thursday (March 11) with some experts in the SPAC field to discuss the positives and negatives of the current process.
“We’re seeing more evidence on the risk side of the SPACs equation as we see studies showing that their performance for most investors doesn’t match the hype,” Allison Herren Lee, the SEC’s acting chair, said.
The SEC is not the only one worrying about the SPAC frenzy. A think tank put together by the Americans for Financial Reform and the Consumer Federation of America has also warned that blank check companies are booming “at the expense of retail investors” in a recent letter to Congress pleading for more regulation.
Before investing in a SPAC, the regulator recommends that investors:
-Examine the background, including the 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, as well as how the SPAC is structured, the securities that are being offered, the risks associated with an investment in the SPAC, the 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 their own investment goals, risk tolerance, investment horizon, net worth, existing investments and assets, debt, and tax considerations.
In other words, do your Due Diligence, and if you don’t understand it, don’t invest.
