The Securities and Exchange Commission (SEC) has found the growing trend of celebrity-endorsed SPACs dangerous enough to warn investors in a new statement: just because a celebrity participates in or is endorsing a SPAC doesn’t mean you should invest.
Celebrity endorsed SPACs have become quite popular in recent months, with former pro-athletes Shaquille O’Neal, Colin Kaepernick, and Alex Rodriguez all getting in on the SPAC game. The timing of the warning from the SEC is directly connected to significant growth in the industry.
The SEC has seen fit to step in and warn investors and caution celebrities before, specifically requiring celeb investors to disclose how much they’re compensated to advertise the investment.
But, the SEC’s advice is relatively simple. Just as if any stranger recommended an investment, there are a lot of unknowns that should be considered first.
“Celebrities, like anyone else, can be lured into participating in a risky investment, and may be better able to sustain the risk of loss,” says the SEC’s Office of Investor Education and Advocacy.
SPACs aren’t going away, and in a culture where many wealthy celebrities are also wealthy investors, it’s important to see past the glamour.
“Even if a celebrity is involved in a SPAC, investing in one may not be a good idea for you. Before investing, always do your research,” writes the SEC.
But the most influential SPAC booster isn’t a celebrity at all, or at least, he didn’t start as one. Chamath Palihapitiya is the founder of Social Capital and the brains behind the SPAC that bought Virgin Galactic. He now has three more SPACs in the works.
The hype surrounding celebrity-endorsed SPACs may have a lot to do with the number of “unicorn” companies around these days. A “unicorn” is a company whose valuation is more than $1 billion. Many companies are staying private longer than they used to, allowing them to reach unicorn status before snagging an IPO.
And it’s entirely possible that someone, like Palihapitiya, has figured out that these companies are long overdue for a public offering, and this method will make money for them rather than the banks who traditionally handle IPOs.
The big SPAC sectors recently have been eclectic vehicle companies, including Nikola, XL Fleet, and Fisker. Another booming sector has been tech, and we’ve even seen big deals in gaming, with companies like Golden Nugget, Draftkings, and Rush Street.
It’s safe to say the SEC has their work cut out for them if the SPAC boom continues. In an article on the American Bar Association website, the suggestion has been made that there will be an uptick in SPAC-related lawsuits. But the ABA also points out, cases are more likely as SPACs gain popularity, regardless of the suits’ merit.