NBA great Shaquille O’Neal is part of one. So are superstar singer Ciara, lifestyle guru Martha Stewart, rocker Sammy Hagar and retired baseball slugger Alex Rodriguez.
These celebrities and many others have become the public faces, part owners and in the case of A-Rod, the chief executive, of special purpose acquisition companies or SPACs — one of the hottest trends on Wall Street and an investment that has grown popular with the general public. SPACs, created to raise money in an initial public offering (IPO) to buy another company, are also drawing scrutiny from government regulators. They worry that all the buzz around SPACs is blinding people to their risks.
Access to SPACS has become easy. Mom-and-pop investors can buy them through online trading sites like Robinhood and Charles Schwab. And at the relatively inexpensive cost of $10 a share, they have attracted tens of thousands of individuals who belong to online SPAC groups, including about a half dozen on Facebook.
“SPACs for once allow the retail investor to feel like they have a chance to invest like an angel investor,” says Travis Mrkvicka, a doctor in Minneapolis, Minnesota, who is part of the 21,500-member SPAC Investing 2021 Facebook group.
Mrkvicka says that SPACs allow people like him to “invest in companies they see promise in at the very earliest stages of their going public — before the IPO runs up like crazy and they’re left, as retail investors so often are, to pick up the leftover pennies.”
SPACs, once a vehicle for mostly institutional investors like big mutual funds, became a popular option for amateur investors roughly six months ago.
Some, like Bill Lyons of Saratoga Springs, New York, jumped into SPAC investing in summer 2020.
“The luster is perhaps starting to fade as the market is pretty flooded,” says Lyons, who invested through his Schwab account and claims to have done well. “Last summer, you could pick a decent SPAC, and it could be up within a month or two at 100% or 200% … which was wild. Now, it’s really under attack.”
SPACs, also called blank check companies, have less detailed information for investors than a traditional IPO, while both are used to convert a private business into publicly traded companies.
With a SPAC, an investor is relying upon the expertise of a sponsor or management team, which sometimes includes celebrity partners for publicity, to raise the funds and then merge with a private firm that then “goes public” which means its stock can trade on exchanges, where anyone can buy and sell it.
With a traditional IPO, a company takes itself public by hiring an investment bank that pitches it to potential investors like mutual funds and hedge funds through a series of presentations called roadshows. By the time a company is ready to go public, it has filed a comprehensive public document with the Securities and Exchange Commission that gives anyone a detailed look at its books and potential risks.
SPACs have become wildly popular, and there are at least 308 on the market with $100 billion in proceeds looking to invest in private companies, according to spacinsider.com, a New York-based subscription site that tracks them. That’s a more than nine-fold increase in proceeds from just three years ago. Southeast Asia’s Grab, a ride-hailing giant, made history in mid-April with the world’s largest SPAC merger at $40 billion.
The investment frenzy has caught the attention of the SEC, and a former…