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Don’t invest in SPACs just because of celebrity endorsements, SEC says

Just because Shaq is involved doesn’t mean you can’t lose your shirt

Shaq wearing Magic Leap One headset Image: Recode

Today, the US Securities and Exchange Commission (SEC) has found the growing trend of celebrity-endorsed special purpose acquisition companies (SPACs) dangerous enough to warn investors in a new statement: just because a celebrity is participating in or endorsing a SPAC, doesn’t mean you should invest.

The terminology can be complicated, but the SEC’s advice is fairly simple. Like if any stranger recommended you invest in a business (in this case, one trying to merge with other companies to take them public), there are a lot of unknowns that should be accounted for. “Celebrities, like anyone else, can be lured into participating in a risky investment,” writes the SEC’s Office of Investor Education and Advocacy. Celebrities, many already being wealthy and successful, “may be better able to sustain the risk of loss.”

Additionally, as part of the deal to be an initial investor or sponsor for a SPAC, celebrities might have economic arrangements that are different from the average shareholder. As much as I’d want to trust Papa John’s board member and basketball star Shaquille O’Neal’s choice in acquiring a specific “audience aggregation platform” (something he’s apparently looking to get into), he might be earning far more than you or I ever will off our likely riskier investments.

The timing for this warning (noted in the tweet above) is directly connected to the exponential growth in the interest in SPACs, from bringing 23andMe public to basically swallowing every electric vehicle startup you’ve heard of. The SEC has seen fit to step in to warn investors and caution celebrities in these kinds of situations in the past, specifically requiring stars to disclose how much they’re compensated to advertise cryptocurrency initial coin offerings (ICOs).

SPACs aren’t going away, and in a culture where many wealthy celebrities are also wealthy investors — or where investors like Chamath Palihapitiya can wield celebrity-like influence over a company and its accompanying value — seeing past the glamour and bluster is necessary.

“Even if a celebrity is involved in a SPAC, investing in one may not be a good idea for you. Before investing, always do your research,” writes the SEC. We all want, nay, need to be friends with Shaq, but that doesn’t mean our money needs to.