FOX Business’s Charles Payne discusses special-acquisition companies (SPACs) and investing with Danielle Shay, director of options for Simpler Trading.
The U.S. Securities and Exchange Commission notified investors Wednesday that they should not invest in a specialty securities firm, or SPAC, simply because a well-known person is involved without naming names.
The warning comes as a growing number of athletes become involved with SPACs. Last month, both MLB All-Star Alex Rodriguez and former NFL player Colin Kaepernick announced plans for their own SPACs. NBA Hall of Famer Shaquille O’Neal and music magnate Jay-Z are among the other celebrities who have SPAC connections.
The process involves setting up a special acquisition target company with the goal of using the proceeds from the initial public offering to buy another business. SPACs have no existing business before their IPO and must return the cash to investors if an acquisition is not completed within two years.
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“Celebrities, like anyone else, can be enticed to participate in a risky investment or better sustain the risk of loss,” the SEC said in a warning to investors. “It’s never a good idea to invest in a SPAC just because someone famous for it sponsors, invests or says it’s a good investment.”
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The SEC has warned that SPAC sponsors are allowed to have a conflict of interest and that their economic interests may differ from those of other shareholders. Sponsors usually acquire shares on more favorable terms. They may also have an incentive to complete the transaction on terms that are less favorable to the average investor.
SPACs have become the preferred way for U.S. companies to go public and have also established some of the most popular names on Wall Street and America, including hedge fund manager Bill Ackman and founder Richard Branson.
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According to Goldman Sachs, one hundred and seventy-five SPACs raised a total of $ 56 billion during the first two months. At the current rate, the amount raised through SPACs will exceed $ 76 billion by the end of March.
The trend is expected to continue over the next two years, as about $ 103 billion in SPAC capital is sought for acquisition targets, Goldman Sachs analysts said. They predict that SPACs could generate up to $ 700 billion in operating activity by the end of 2022.