The seat of the United States Securities and Exchange Commission (SEC) is seen in Washington, DC, on January 28, 2021.
Saul Loeb | AFP | Getty Images
The Securities and Exchange Commission on Wednesday issued a warning against celebrity-backed special-purpose acquisition companies, urging investors to think twice before taking action.
“Celebrity involvement in a SPAC does not mean that investing in a particular SPAC or SPACs is generally appropriate for all investors,” said the SEC in an investor warning posted on its website.
“Celebrities, like anyone else, can be tricked into participating in a risky investment or they may be better able to bear 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, “said the agency.
The explosive popularity in the SPAC market has attracted a number of athletes and other famous figures to join the movement. NBA star Shaquille O’Neal is serving as a consultant to Forest Road Acquisition Corp, which announced a triple merger with fitness company BeachBody last month. Musician Ciara Wilson is the director of Bright Lights Acquisition, which targets a company in the media and entertainment industry. Former MLB star Alex Rodriguez also launched his own SPAC recently.
SPACs raise capital in an initial public offering and use the money to merge with a private company and make it public, usually within two years. The issuance continued at its record pace this year, with more than $ 77 billion raised in the first quarter of 2021 alone, already rivaling the capital of the year 2020, according to SPAC Research.
The SEC said investors should do their own research before investing in SPACs. These businesses are considered to be more risky than traditional IPOs because there are generally no linked transactions.
“Never invest in a SPAC based solely on a celebrity’s involvement or solely on other information you receive through social media, investment newsletters, online ads, email, investment research sites, chat rooms Internet, direct mail, newspapers, magazines, television or radio, “the SEC said in the warning.
CNBC’s Jim Cramer had already raised a red flag over these celebrity SPACs, saying they “seemed like an inside joke to the super-rich.”
“These new SPACs increasingly look like an inside joke to the super-rich and a way for celebrities to monetize their reputations,” he said. “Believe me, you don’t want to invest in someone else’s internal joke, so please, please, how to avoid getting hurt [is to] do your homework on people and if there are companies before you get close to these things. “