Unsuitably Risky SPACs, "A License to Rip Investors Off," Rile SEC and FINRA Regulators

Attorney Advising Disclaimer

With starpower ranging from Shaquille O'Neal to Serena Williams touting a little-known investment vehicle known as a Special-Purpose Acquisition Company (SPAC), regulators have become concerned that celebrity endorsement mixed with pop culture trends and pressures may steer some brokers and financial advisers to recommend SPACs to customers for whom these shell corporation investments may be unsuitable.

The SPAC risk has become so severe, the SEC on March 10, 2021 issued an investor alert entitled Celebrity Involvement with SPACs in which the federal regulator bluntly cautioned in bold-italicized text: "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."

A SPAC is also known as a "blank check company" because that's essentially what it is: a shell corporation on the NYSE, NASDAQ, or some other stock exchange with the purpose of acquiring a private company, effectively making the private company public without going through the traditional initial public offering (IPO) process: standard regulatory procedures and the traditional IPO prospectus focusing on historical facts are shunned for the SPAC securities offering at a unit price without the requirement that SPACs be specific about their acquisition targets (which SPACs do not have to identify or pre-disclose).

This could expose investors to tremendous risk and "very low returns," according to economist Dean Baker. For instance, FINRA in a Regulatory Notice providing guidance on SPACs, wrote about a few risks, including "the risk that SPAC managers are unqualified or incompetent" and "the risk that no acquisition will occur and the SPAC will be liquidated."

In other words, if an SPAC fails to acquire a company, it faces the risk of liquidation. Even if acquisition is completed, FINRA warns, "the customer's investment may decline in value."

FINRA also identified as risks related to SPACs: misrepresentations and omissions in offering documents and communications with shareholders, fees associated with SPAC transactions, and fraudulent insider trading—which is a heightened risk due to the SPAC's ability to sidestep certain traditional regulatory requirements and rules.

For celebrities with an obscene amount of excessive money to spend, sponsoring or creating an SPAC is not just trendy, but a conceptually simple process: Create an SPAC, take that SPAC public, and use your superstar platform to sell shares for the shell corporation you just created. Using that investment money, find a private company to acquire or merge and then take that private company public.

Alex Rodriguez's SPAC is called Slam Corp, Colin Kaepernick is part of the SPAC Mission Advancement, and Jay-Z is part of a cannabis SPAC.

For investors, the draw is two-fold. In addition to largely unsourced or unfounded claims and even misrepresented guarantees of large returns, investors might be drawn to associate their investment funds with a celebrity—effectively taking the old-fashioned autograph line outside of the ballpark and turning it into an online investment vehicle and the chance to invest in Celeb A's SPAC.

But instead of sacrificing a few hours on a Sunday afternoon waiting around a stadium, the SPAC's sacrifice is an investor's cold hard cash or capital. As the SEC cautions, "celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors."

Furthermore, celebrity ownership or sponsorship of their SPAC might lead to what the SEC calls a "differing economic interests" situation in which the celebrity, firm, or broker promoting the SPAC may stand to benefit substantially more than customers who may potentially invest with the SPAC: this conflict of interest is another SPAC risk that investors should carefully consider.

Several investment personalities have sounded the warning bell on SPACs: Investor GMO's Jeremy Grantham called SPACs "a license to rip investors off" while Warren Buffett business partner Charlie Munger categorized SPACs as "crazy speculation."

If you have invested through a stockbroker or financial adviser in a Special Purpose Acquisition Company (SPAC) that was not in you best interest, unsuitably recommended to you through misrepresentations or omissions of material facts—such as a failure to disclose a conflict of interest—or whose excessively risky operation not in accordance with your risk tolerance preferences or investment objectives has proven harmful to your investments or interests, or otherwise resulted in losses, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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