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SEC warns investors: Don’t invest in SPACs based on celebrity endorsements

The list of famous figures promoting special-purpose acquisition companies, or SPACs, continues to grow, and the Securities and Exchange Commission is worried that this trend will end badly for retail investors.

Celebrities ranging from baseball star Alex Rodriguez to former Speaker of the House Paul Ryan have signed on to back these shell companies, which raise money via IPOs with the intent of using the funds raised to acquire a privately held company, creating a new, publicly traded entity.

But in an investor alert issued Wednesday, the SEC warned that “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 alert went on to say that SPACs carry unique risks relative to traditional IPOs, because SPAC sponsors typically buy equity in the company at more favorable terms than are offered to the public. “As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combinations, and may have an incentive to complete a transaction on terms that may be less favorable to you.”

The number of SPAC IPOs has risen sharply in recent years, from 59 in 2019 to 248 in 2020, and there have been 239 such IPOs so far in 2021, according to data from SPAC Analytics.

The SEC is not alone in cautioning investors about SPACs. Charlie Munger, the Berkshire Hathaway Inc.
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vice chairman, criticized the vehicles, saying in February, “I think the world would be better off without them,” pointing to them as an example of “crazy speculation.”

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