Don鈥檛 get starstruck by celebrity-endorsed SPACs, SEC says
17 March 2021 US
Image: stock.adobe.com/iQoncept
The 色花堂and Exchange Commission鈥檚 Office of Investor Education and Advocacy (OIEA) says celebrities are not immune to making risky investments when it comes to SPACs and may be better able to sustain any losses incurred.
The rise of retail trading alongside poorly-regulated social media platforms acting as the primary forum for information is sounding alarm bells with regulators and short sellers alike, who fear that some companies may artificially inflate their worth or misrepresent themselves to investors.
This trend is particularly concerning in the context of companies presenting themselves as promoters of environmental, social and governance, where a lack of oversight means so-called greenwashing is prevalent as many seek to capture some of the heavy inflows into this sector.
In this context, the OIEA says that as special purpose acquisition companies have become a popular way to transition a company from a private company to a publicly-traded one, it is cautioning investors not to base SPAC-related investment decisions solely on celebrity involvement or endorsement.
The OIEA says SPACs 鈥� blank check companies which raise money from investors, list on a stock market and then look for an acquisition target to take public 鈥� come with their own set of risks, separate to the more traditional IPO. In particular, celebrity sponsors may have a conflict of interest which means their economic interests in the SPAC may differ from shareholders.
The federal agency recommends would-be investors use its online investment portal to conduct background research on anyone recommending a SPAC and, as each SPAC may have its own unique features, it鈥檚 important to learn about the SPAC鈥檚 structure, sponsors and what securities are being offered. This information should be considered carefully in light of the investor鈥檚 goals, risk tolerance and existing investment assets and debt, the OIEA adds.
The OIEA concludes with an exhaustive list of media channels that should not be considered as reliable advice when investing in a SPAC, including social media, investment newsletters, online advertisements, email, investment research websites, internet chat rooms, direct mail, newspapers, magazines, television, or radio.
The SEC鈥檚 latest warning is on the way social media is increasingly playing a role in retail investor decisions. Hot on the heels of the GameStop saga, the SEC published advice warning of the significant risks of short-term investing based on social media, especially in volatile markets, and provided tips for long-term investing.
Celebrity endorsed-SPACs have also felt the ire of activist short sellers. Hindenburg Research on healthcare provider Clover Health鈥檚 alleged malfeasance, which argues that Clover鈥檚 鈥淲all Street celebrity promoter鈥�, Chamath Palihapitiya, misled investors about critical aspects of Clover鈥檚 business in the run-up to the company鈥檚 SPAC initial public offering.
Palihapitiya went on a major promotional campaign for Clover in the months leading up to the company going public, presenting it as a panacea to complaints of price gouging and up-selling that are common in the established US healthcare sector.
The rise of retail trading alongside poorly-regulated social media platforms acting as the primary forum for information is sounding alarm bells with regulators and short sellers alike, who fear that some companies may artificially inflate their worth or misrepresent themselves to investors.
This trend is particularly concerning in the context of companies presenting themselves as promoters of environmental, social and governance, where a lack of oversight means so-called greenwashing is prevalent as many seek to capture some of the heavy inflows into this sector.
In this context, the OIEA says that as special purpose acquisition companies have become a popular way to transition a company from a private company to a publicly-traded one, it is cautioning investors not to base SPAC-related investment decisions solely on celebrity involvement or endorsement.
The OIEA says SPACs 鈥� blank check companies which raise money from investors, list on a stock market and then look for an acquisition target to take public 鈥� come with their own set of risks, separate to the more traditional IPO. In particular, celebrity sponsors may have a conflict of interest which means their economic interests in the SPAC may differ from shareholders.
The federal agency recommends would-be investors use its online investment portal to conduct background research on anyone recommending a SPAC and, as each SPAC may have its own unique features, it鈥檚 important to learn about the SPAC鈥檚 structure, sponsors and what securities are being offered. This information should be considered carefully in light of the investor鈥檚 goals, risk tolerance and existing investment assets and debt, the OIEA adds.
The OIEA concludes with an exhaustive list of media channels that should not be considered as reliable advice when investing in a SPAC, including social media, investment newsletters, online advertisements, email, investment research websites, internet chat rooms, direct mail, newspapers, magazines, television, or radio.
The SEC鈥檚 latest warning is on the way social media is increasingly playing a role in retail investor decisions. Hot on the heels of the GameStop saga, the SEC published advice warning of the significant risks of short-term investing based on social media, especially in volatile markets, and provided tips for long-term investing.
Celebrity endorsed-SPACs have also felt the ire of activist short sellers. Hindenburg Research on healthcare provider Clover Health鈥檚 alleged malfeasance, which argues that Clover鈥檚 鈥淲all Street celebrity promoter鈥�, Chamath Palihapitiya, misled investors about critical aspects of Clover鈥檚 business in the run-up to the company鈥檚 SPAC initial public offering.
Palihapitiya went on a major promotional campaign for Clover in the months leading up to the company going public, presenting it as a panacea to complaints of price gouging and up-selling that are common in the established US healthcare sector.
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