SEC Cautions On Celebrity SPACs, Considers Adding To Disclosures

The U.S. Securities and Exchange Commission held a meeting Thursday and among the topics covered were special purpose acquisition companies and how they should be viewed going forward.

What Happened: The SEC hosted a panel with some experts in the SPAC field to discuss the positives and negatives of the current process.

“Many investors and commentators significantly misunderstand SPACs and their costs, particularly the role of warrants and redemptions in increasing SPAC costs and how merger agreements can leave investors bearing SPAC costs,” panelist Michael Ohlrogge said.

The performance of SPACs, especially post-merger was discussed by several of the panelists.

“We’re seeing more evidence on the risk side of the SPACs equation as we see studies showing that their performance for most investors doesn’t match the hype,” Allison Herren Lee said.

The SEC is taking a look at the disclosure issues surrounding the SPAC business combinations. Disclosures have been a topic of debate for SPACs before and date back to comments made in December by the SEC on the difference of disclosures that traditional IPOs have from SPACs.

“The SPAC panel is considering implications of the current market trends in valuation, acquisition targets, alignment in versus conflicts of interest, quality of disclosure and litigation.”

Related Link: 10 SPACs Trading Under $11 For Investors To Consider In 2021

Celebrity SPACs: On Wednesday, the SEC shared caution with investors to stay away from SPACs with celebrities involved.

“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 said.

Celebrities include movie stars and athletes according to the SEC. “Well-known professional investors” were also listed as potential celebrities in SPACs by the SEC.

“Celebrities can be lured into participating in a risky investment or may be better able to sustain the risk of loss. 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 points to SPAC sponsors having equity in the SPAC at more favorable terms than most investors. The sponsor may also have an incentive to complete a transaction.

Benzinga’s Take: There are now 500 SPACs on the market. Investors should do their own research and know the management teams and disclosures prior to making an investment. Several SPACs that have announced deals have celebrities on board and that may not make the SPAC a bad investment for the future.

Many of the SPAC deal announcement press releases have disclosures that show the funding breakdowns. Investor presentations break down into further detail the ownership structure and capital breakdown of the deal. The SEC could make some of the information available in the investor presentation a part of the press release as well.