Buyer beware: SPAC investments may not be the good deal they appear to be

Buyer beware! You’ve probably heard of special-purchase acquisition companies — SPACs for short — which raise money in initial public offerings from investors without actually revealing how they plan to deploy it, and then trade on exchanges with nothing more to offer investors than cash in the bank and the promise to someday invest it wisely. The SPAC will buy a private company or two, and shareholders in the resulting public company will have a viable business in their portfolios.

There is something of a SPAC boom going on right now; there are roughly 600 of them on the market. There are currently so many that they are having a hard time raising the cash for whatever mysterious purposes they plan for it. As a result, some SPACs have sought celebrity names to attach to their ventures. Shaquille O’Neal, Gary Cohn, Bill Ackman, Paul Ryan and Colin Kaepernick are all celebrities who have invested in SPACs. But, buyer beware; these companies may not be what they seem.

How do SPACs work?

First, the celebrity sponsor raises capital by taking an empty holding company public in an initial public offering, or IPO. Then, the SPAC uses the money made from the IPO to acquire a private company, making it public. Large amounts of stock are also issued to the newly purchased private company. Since the SPACs issue so much stock to the private company, the private company ends up in control of the entire entity.

Unlike in traditional IPOs, the celebrity sponsor gets a 20% stake. However, buyers beware! There is also much less regulatory scrutiny than there would be in a traditional IPO. What’s more, the sponsor hardly has to invest anything in exchange for their 20% stake in the company. Even if the SPAC performs terribly and share prices plummet, the sponsor could still walk away with millions of dollars, while everyday investors risk losing everything they have invested.

Have SPACs performed well enough to be worth the risk?

Of the 33 SPACs tied to famous figures, 21 posted negative returns for 2021. If an unlucky investor had invested alongside all 33 celebrities, they would have experienced an 11% drop in value. Buyer beware: even tying their companies to A-list celebrities couldn’t save these SPACs from dismal performance.

The cannabis-focused Parent Company associated with rapper Jay-Z has experienced a particularly awful 84% plunge, but Beachbody, with ties to Shaquille O’Neal, and Martha Stewart’s AppHarvest Inc. were both down 66% in 2021. 

Not that other SPACs were doing much better. In fact, the DeSPAC Index, which is tracking 25 companies that went public by merging with a SPAC, is down more than 40% this year.

If you are ready to invest in your future, buyer beware! Don’t look to famous celebrities to secure your finances. Let our CERTIFIED FINANCIAL PLANNER™ professionals assist you in attaining your financial goals.

Talk to a ProVise CFP® professional about your safe and secure investment options

At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about investing? Contact ProVise today to schedule a complimentary consultation.