Risk & Compliance

SEC Cautions On Celebrity SPACs

“Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.”
Lauren MuskettMarch 12, 2021

The U.S. Securities and Exchange Commission held a meeting Thursday and among the topics covered were special purpose acquisition companies (SPACs) and how they should be viewed going forward.

What Happened: The SEC hosted a panel with some experts in the SPAC field to discuss the positives and negatives of the current process.

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“Many investors and commentators significantly misunderstand SPACs and their costs, particularly the role of warrants and redemptions in increasing SPAC costs and how merger agreements can leave investors bearing SPAC costs,” panelist Michael Ohlrogge, an assistant professor at New York University’s School of Law, said.

The performance of SPACs, especially post-merger, was discussed by several of the panelists.

“We’re seeing more evidence on the risk side of the SPACs equation as we see studies showing that their performance for most investors doesn’t match the hype,” Allison Herren Lee, the SEC’s acting chair, said.

The SEC is taking a look at the disclosure issues surrounding the SPAC business combinations. Disclosures have been a topic of debate for SPACs before and date back to comments made in December by the SEC on the difference of disclosures that traditional IPOs have from SPACs.

“The SPAC panel is considering implications of the current market trends in valuation, acquisition targets, alignment in versus conflicts of interest, quality of disclosure and litigation,” the SEC said.

Celebrity SPACs: On Wednesday, the SEC shared caution investors against investing in SPACs because a celebrity is involved.

“Celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors,” the SEC said.

Celebrities include movie stars and athletes according to the SEC. “Well-known professional investors” were also listed as potential celebrities involved in SPACs.

“Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain 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,” the commission said.

The SEC points to SPAC sponsors having equity in the SPAC at more favorable terms than most investors. The sponsor may also have an incentive to complete a transaction.

Benzinga’s Take: There are now 500 SPACs on the market. Investors should do their own research and know the management teams and disclosures prior to making an investment. Several SPACs that have announced deals have celebrities on board and that may not make the SPAC a bad investment for the future.

Many of the SPAC deal announcement press releases have disclosures that show the funding breakdowns. Investor presentations break down into further detail the ownership structure and capital breakdown. The SEC could make some of the information available in the investor presentation a part of the press release as well.

This story originally appeared on Benzinga. © 2021 Benzinga.com.

Benzinga does not provide investment advice. All rights reserved.