With offerings from special purpose acquisition companies (SPACs) increasingly dominating the U.S. new issue business, the U.S. Securities and Exchange Commission (SEC) is warning investors against buying into deals based on celebrity endorsements.
Much like Canada’s capital pool companies, which raise funds to finance a future acquisition, SPACs are “blank cheque” companies that sell securities despite having no operating business of their own, with the promise that they will acquire a functioning company in the next year or so.
Recently, celebrity athletes, including Shaquille O’Neal and Colin Kaepernick, actors and other public figures have been endorsing SPACs — which has now prompted a warning from the SEC’s Office of Investor Education and Advocacy.
The SEC alert said that investors should not buy into SPACs based solely on the involvement of a celebrity.
“Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss,” the SEC said. “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.”
Additionally, the SEC noted that SPAC vehicles have different kinds of risks compared with traditional IPOs depending on how they’re structured, which may give rise to heightened conflicts of interest and other risks for investors.