The Agency told the public on Wednesday “Never invest in a SPAC focused solely on the participation of celebrities.” The alarm comes when professional athletes, politicians and pop stars lend the prestige of these white check companies known as acquisition companies for special purposes (SPACs).
Slam SPAC started trading on the Nasdaq last month, after collecting 500 million dollars. “Celebrities, like anyone else, may be drawn into a risky investment or better prepared to support loss risk,” said the SEC. “Investing in SPAC is never a good idea just because someone who funds or invests famous people or thinks they’re good investments.”
In essence, SPACs are shell enterprises with no operating assets. They only exist for the acquisition and publishing of an undisclosed private corporation.
SEC is evaluating SPACs
For several years SPACs were derided on Wall Street, also known as reverse fusions. The thought was: Why are they not on the conventional IPO route if they are quality companies? But in the last two years they have become increasingly popular, with large companies like Virgin Galactic and DraftKings preferring this direction rather than a conventional IPO.
Earlier this week, following a merger with a SPAC, View, an intelligent window business backed by the SoftBank, debuted on the Nasdaq. Some analysts worry that the SPAC boom is a burst, fuelled by low interest rates, and an increase in retail investment interest rates.
Berkshire Hathaway Vice-President Charlie Munger said recently, “I feel that the world will be safer without them. Others, including Hedge Fund Manager Mark Yusko, say that SPAC criticism is incorrect, since it is a cheaper and more successful way to make public corporations.
Bone of contention
The SEC has cautioned, however, that SPACs are different from conventional IPOs and “have separate risks.” The agency pointed out how SPAC sponsors, such as celebrities, “may have conflicts between their economic interests and those of ordinary shareholders.”
For example, SEC has suggested that SPAC sponsors normally buy SPAC equity at “more favorable terms” than IPO or open-market investors. This implies, the SEC said, that they would profit from the merger and “might be encouraged to conclude a deal on less favorable terms.”
The SEC urges investors to “turn out your research all the time,” including to explore the background of SPACs and understand the structure of SPACs. “Even if a celebrity takes part in a SPAC, it may not be good for you to invest in one,” said the agency.
