A few months after cautioning investors about investing in a special purpose acquisition company, or SPAC, the Securities and Exchange Commission warned investors Wednesday to be wary of SPACs that have celebrity involvement.
Celebrity involvement in a SPAC — as a sponsor or investor — does not mean that the investment "generally is appropriate" for all investors, the SEC warned in its 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 SEC said. "Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss."
Shaquille O'Neal, Former House Speaker Paul Ryan and famed investor Bill Ackman are just a few celebrities promoting SPACs.
SPACs have become a popular vehicle for transitioning a private company to a publicly traded one, the SEC explains.
A SPAC is a blank-check company with no operations that offers securities for cash through an initial public offering. SPACs then have a specified period of time — typically two years — to identify and merge with a private operating company, according to the SEC.
"This business combination is often used as an alternative means of taking the acquired company public, rather than through a traditional IPO," the SEC stated.
SPAC transactions differ from traditional IPOs, the SEC stated, "and have distinct risks associated with them."
