Investors Flock To SPACs Based On Celebrity Backings

Investors from all levels of expertise have been flocking to special purpose acquisition companies (SPACs), a tendency that has some financial planners — and the Securities and Exchange Commission (SEC) — worried, Bloomberg reported on Wednesday (March 10).

SPACs, also known as blank-check companies, operate like corporate shells that exist to take companies public. The maneuver sidesteps initial public offerings (IPO) regulatory requirements as well as other requirements. People who put money into SPACs often have no idea what they are even investing in, gambling on the founder’s overall reputation and popularity. It’s this aspect that has finance experts concerned.

Numerous blank-check companies have the added attraction of being endorsed by Wall Street billionaires, celebrities and athletes. Jay-Z, Shaquille O’Neal and Ciara Wilson are just a few of the big names attached to SPACs.

Michelle Lowry, a Drexel University finance professor, told Bloomberg that when unknowledgeable people buy into SPACs, it’s more like gambling than investing.

“We saw this during the internet bubble,” Lowry said. “There were a record number of IPOs, huge first-day returns, and everybody’s talking about it. And if everybody’s talking about it in the conversation, you want to give it a shot.”

Last year, SPACs were responsible for bringing in more than $83 billion from investors, up from $13.6 billion in 2019, according to Bloomberg data. This year, SPACs have so far notched in excess of $70 billion.

The SEC issued an alert to SPAC investors on Wednesday (March 10) advising them to use resources beyond celebrity and billionaire endorsements when making decisions. “Celebrities, like anyone else, 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,” according to the bulletin.

Former Yankees all-star third baseman Alex Rodriguez started the SPAC Slam Corp. and was reportedly looking to raise $500 million in its IPO. Hedge fund Antara Capital backs the firm along with A-Rod.