The list of famous figures promoting special-purpose acquisition companies, or SPACs, continues to grow, and the Securities and Exchange Commission is concerned that this trend will end badly for retail investors.
Celebrities like baseball star Alex Rodriguez to former mayor Paul Ryan signed a contract to support these shell companies, which raise money through IPOs with the intention of using the funds raised to acquire a private company, creating a new publicly traded entity.
But in an investor warning issued on Wednesday, the SEC warned that “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 alert went on to say that SPACs carry unique risks compared to traditional IPOs, because SPAC sponsors typically buy shares in the company on more favorable terms than those offered to the public. “As a result, sponsors will benefit more than investors from completing a business combination through SPAC and may have an incentive to complete a transaction on terms that may be less favorable to you.”
The number of SPAC IPOs has increased dramatically in recent years, from 59 in 2019 to 248 in 2020, and there have been 239 of those IPOs so far in 2021, according to data from SPAC Analytics.
The SEC is not alone in warning investors about SPACs. Charlie Munger, Berkshire Hathaway Inc. BRK.B,
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The vice president criticized the vehicles, saying in February: “I think the world would be better off without them”, pointing them out as an example of “crazy speculation”.