Charles Payne of FOX Business discusses special-purpose acquisition (SPACs) and investments with Simpler Trading’s options director, Danielle Shay.
The United States Securities and Exchange Commission on Wednesday notified investors not to invest in a special-purpose acquisition company, or SPAC, just because a celebrity is involved without naming names.
The warning comes as an increasing number of athletes are getting involved with SPACs. Last month, both MLB All-Star Alex Rodriguez and former NFL player Colin Kaepernick announced plans for their own SPACs. The NBA Hall of Fame Shaquille O’Neal and music mogul Jay-Z are among the other celebrities who have connections with SPAC.
The process involves the formation of a special purpose acquisition company in order to use the proceeds from its initial public offering to buy another company. SPACs have no existing business prior to their IPO and are expected to return money to investors if the acquisition is not completed in two years.
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“Celebrities, like anyone else, may be tricked into participating in a risky investment or they may be better able to sustain the risk of loss,” the SEC said in an investor warning. “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.”
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The SEC warned that SPAC sponsors may have a conflict of interest and that their economic interests may differ from those of other shareholders. Sponsors generally purchase shares on more favorable terms. They could also have an incentive to complete the deal on terms less favorable to the average investor.
SPACs have become the preferred way for US companies to go public and have also attracted some of the most famous names from Wall Street and corporate America, including hedge fund manager Bill Ackman and the founder of Virgin Group Ltd. Richard Branson.
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One hundred and seventy-five SPACs raised a total of $ 56 billion during the first two months of this year, according to Goldman Sachs. At the current rate, the amount of money raised via SPACs will exceed last year’s US $ 76 billion at the end of March.
The trend is expected to continue over the next two years, as approximately $ 103 billion in SPAC capital seeks acquisition targets, analysts at Goldman Sachs said. They predict that SPACs can generate up to $ 700 billion in business activities by the end of 2022.