The SEC warns investors of buying celebrity-backed SPACs as the blank-check craze persists

SPACs and hedge funds 2x1
  • The SEC is “taking a hard look at the disclosures and other structural issues surrounding SPACs.”
  • The Commission released an Investor Alert on Wednesday warning investors about the risks of celebrity-backed SPACs.
  • The SEC said SPAC sponsors may have conflicts of interest and are receiving shares at “more favorable terms.”
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The Securities and Exchange Commission said it’s “taking a hard look” at the recent rise of SPACs and warned investors of the risks involved with celebrity-backed blank check firms in a Wednesday Investor Alert.

“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 wrote. “Never invest in a SPAC based solely on a celebrity’s involvement or based solely on other information you receive through social media.”

Special Purpose Acquisition Companies, or SPACs, have become the talk of the markets lately. Over 200 SPACs have raised some $US70 ($91) billion so far this year, according to data compiled by Bloomberg.

The boom in blank-check firms has drawn the eye of regulators. In a Wednesday Investor Alert, the SEC educated investors about SPACs and warned of the distinct risks involved with the blank check firms.

The Commission noted two key differences between SPACs and IPOs that investors should be aware of. First, SPAC sponsors typically acquire equity in SPACs at “more favorable terms than investors in the IPO or subsequent investors on the open market.”

Second, SPAC sponsors “may have conflicts of interest” when it comes to a SPAC’s success. This means initial investors “economic interests in the SPAC may differ from shareholders.”

The Commission also linked to SEC’s EDGAR database, the search tool on Investor.gov, and other sources to help retail investors.

The rise in SPACs hasn’t just led more retail investors into risky stocks, it’s also caused a massive increase in the number of public listings by zero revenue companies.

The number of public listings by companies without revenues valued above $US1 ($1) billion in 2021 is expected to exceed what was seen in the dot-com era. 16 companies are expected to go public without revenues this year and 14 of those are SPACs.

The boom in SPACs has some analysts and economists concerned. A think tank put together by the Americans for Financial Reform and the Consumer Federation of America even said SPACs are booming “at the expense of retail investors” in a recent letter to Congress pleading for more regulation.

Perhaps because of this, the newly appointed Director of the SEC’s Division of Corporation Finance said he will be taking a look into SPACs.

“The rapid increase in the volume of SPACs represents a significant change and we are taking a hard look at the disclosures and other structural issues surrounding SPACs,” said John Coates, Acting Director of the SEC’s Division of Corporation Finance.