Don't invest in a SPAC just because a celeb is involved, SEC warns

New York(CNN Business) Shaquille O'Neal, Colin Kaepernick, Jay-Z and other celebrities are jumping into the SPAC boom. And the SEC is getting worried.

"Never invest in a SPAC based solely on a celebrity's involvement," the agency warned the public in an alert Wednesday.

The warning comes as professional athletes, politicians and pop stars lend their star power to the popularity of these blank-check firms, known as special purpose acquisition companies (SPACs).

Last month, Alex Rodriguez's SPAC, Slam Corp., began trading on the Nasdaq after raising $500 million.

"Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss," the SEC said. "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."

SPACs are essentially shell companies with no operating assets. They exist solely to buy an undetermined private company and take it public.

SEC is 'taking a hard look' at SPACs

The SEC also signaled it may take action aimed at protecting people from risks associated with SPACs.

John Coates, acting director of the SEC's division of corporate finance, said in a tweet that the agency is "taking a hard look at the disclosures and other structural issues surrounding SPACs."

For many years SPACs, also known as reverse mergers, were derided on Wall Street. The thinking was: If these are quality companies, why aren't they going the traditional IPO route? But they have become increasingly popular over the past two years, with major companies like Virgin Galactic and DraftKings choosing this path instead of a traditional IPO.

Earlier this week, View, a smart window company backed by SoftBank, made its debut on the Nasdaq after a merger with a SPAC.

Some experts worry the SPAC boom is a bubble waiting to burst, fueled by rock-bottom interest rates and a surge of interest among retail investors.

"I think the world would be better off without them," Berkshire Hathaway vice chairman Charlie Munger said recently.

Others, like hedge fund manager Mark Yusko, say the criticism of SPACs is misplaced because they are a cheaper and more efficient way to bring companies public.

'Conflicts of interest'

But the SEC warned that SPACs differ from traditional IPOs and "have distinct risks associated with them."

The agency pointed to how sponsors of SPACs — like celebrities — "may have conflicts of interest" that make their economic interests different from those of regular shareholders.

For instance, the SEC noted that SPAC sponsors generally buy equity in the SPAC at "more favorable terms" than investors in the IPO or on the open market. That means, the SEC said, that they will benefit more from the completion of the merger and "may have an incentive to complete a transaction on terms that may be less favorable to you."

The SEC urged investors to "always do your research," including by investigating the background of those recommending SPACs and understanding how the SPACs are structured.

"Even if a celebrity is involved in a SPAC, investing in one may not be a good idea for you," the agency said.