Buyer beware: Celebrity-endorsed SPACs

By Ken Tysiac

Investors shouldn't make investing decisions related to a special-purpose acquisition company (SPAC) based solely on celebrity involvement with the SPAC, according to an investor bulletin issued Wednesday by the SEC.

Many celebrities, such as movie stars and professional athletes, are involved in investment opportunities related to SPACs, which are shell companies formed for the purpose of acquiring or merging with a private company and taking it public.

The SEC's bulletin cautioned that 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 warned that celebrities are just as vulnerable as anyone else to be lured into participating in a risky investment.

Celebrities also might be better able to sustain the risk of loss in a SPAC, 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," the bulletin states.

The SEC warned that SPAC sponsors might have conflicts of interest, so their economic interests in the SPAC might differ from those of shareholders. Before investing in a SPAC, the SEC recommends that investors:

  • Examine the background, including the registration or license status, of anyone recommending a SPAC, using the search tool on Investor.gov.
  • Learn about the SPAC sponsors' backgrounds, experience, and financial incentives, as well as how the SPAC is structured, the securities that are being offered, the risks associated with an investment in the SPAC, the plans for a business combination, and other shareholder rights by carefully reading any prospectus that may be available through the SEC's EDGAR database.
  • Consider the investment's potential costs, risks, and benefits in light of their own investment goals, risk tolerance, investment horizon, net worth, existing investments and assets, debt, and tax considerations.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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