The list of famous figures promoting acquisition companies for special uses or SPAC, continues to grow and the Securities and Exchange Commission is concerned that this trend will end badly for retail investors.
Celebrities ranging from baseball star Alex Rodriguez to former House Speaker Paul Ryan have signed up to support these prominent companies, which raise money through IPOs with the intention of using the funds raised to acquire a private company, creating a new entity trading company.
But in an investment alert released Wednesday, the SEC warned that “it’s never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it’s a good investment.”
The alert goes on to say that SPACs carry unique risks in relation to traditional IPOs, because SPAC sponsors tend to buy shares in the company on more favorable terms than those offered to the public. “As a result, sponsors will benefit more than investors from the SPAC’s conduct of business combinations and may have an incentive to complete a transaction on terms that may be less favorable to you.”
The number of SPAC OPOs has increased dramatically in recent years, from 59 in 2019 to 248 in 2020, and so far there have been 239 IPOs since 2021, according to SPAC Analytics data.
The SEC is not the only one to warn investors about SPACs. Charlie Munger, of Berkshire Hathaway Inc. BRK.B,
BRK.A,
vice president, criticized the vehicles and said in February, “I think the world would be better off without them,” pointing to them as an example of “crazy speculation.”