The US Securities and Exchange Commission said on Thursday celebrity endorsements of SPACs, special purpose acquisition companies, could be illegal if they do not disclose the compensation they received in exchange for the promotion.
The warning marks an effort from the US top watchdog to address what has become a recent trend.
The SEC added that anyone selling or promoting investments should comply with federal securities laws that mandate anyone promoting a sale to disclose their financial relationship to the company.
Failure to disclose such information constitutes a “violation of the anti-touting provisions of the federal securities laws.” The SEC added that people making these endorsements may also be “liable for potential violations of the anti-fraud provisions” for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.
Additionally, the SEC is warning investors to be wary, explaining that celebrity involvement in a particular SPAC does not mean it is appropriate for everyone.
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“Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. 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 commission added.
In essence, a SPAC is a shell company that lists on a stock exchange with the purpose of buying another business and taking it public without consuming the time, costs and regulatory oversight required for traditional IPOs.
Many athletes, politicians and musicians were caught backing SPACs, which have raised more than $70 billion in 2020. That sum was greater than all the funds that the sector raised in the past 10 years.
Like ICOs and similar crypto-related fundraisings, SPAC mania has entered the celebrity phase. As such, the trend of celebrity endorsements forced the US regulators to release the official statement ordering the involved celebrities to disclose the nature, scope, and amount of compensation received in exchange for the promotion.
“SPAC sponsors generally acquire equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market. As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combination and may have an incentive to complete a transaction on terms that may be less favorable to you,” the SEC notes.