The list of well-known figures encouraging special purpose construction companies, or SPACs, is growing, and the Securities and Exchange Commission is concerned that this move will end badly for retail investors.
Celebrities from basketball star Alex Rodriguez to former House Speaker Paul Ryan have signed up to support these shell companies, which raise money through IPOs with the intention of using money to acquire a private company, creation of a new company, public commercial entity.
But in an investor warning issued on Wednesday, the SEC warned “it is never a good idea to invest in SPAC just because a celebrity is supporting either investing in it or saying it’s a good investment. ”
The warning went on to say that SPACs have certain risks compared to traditional IPOs, as SPAC sponsors typically buy in-company equity at more favorable terms than they are offered to the public. “As a result, the sponsors will benefit more than investors from the completion of the SPAC merger, and may be motivated to conclude a transaction on terms that may be so favorable to you. ”
The number of SPAC IPOs has increased significantly in recent years, from 59 in 2019 to 248 in 2020, and there have been 239 such IPOs to date in 2021, according to data from SPAC Analytics.
The SEC is not alone in warning investors about SPACs. Charlie Munger, Berkshire Hathaway Inc. BRK.B,
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The vice-chairman criticized the vehicles, saying in February, “I think the world would be better off without them,” citing them as an example of “cunning profiteering.” ”