SEC Warns Over Celebrity Endorsements on SPACs

The SEC warned investors not to make investment decisions related to SPACs based solely on celebrity involvement.

Movie stars and professional athletes are increasingly active in endorsing investment opportunities, leading to many scandals throughout the years, mostly related to cryptocurrencies and initial coin offerings.

Now that special purpose acquisition companies, or SPACs, are the new thing, celebrities are making their way to endorse them in exchange for their fee and/or access to improved conditions.

This led the US regulator to warns that “celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors. 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.

“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”, said the SEC.

SPAC has grown in popularity as firms look for an alternative to IPOs. This process allows the company to transition to a public traded one with no operations that offers securities for cash through an initial public offering (IPO). SPACs then have a specified period of time—typically two years—to identify and merge with a private operating company.

Floyd Mayweather and DJ Khaled charged by the SEC for undisclosed payments with ICOs

Prior to SPACs, many celebrities were endorsing initial coin offerings (ICO) and not disclosing them with the proper authorities.

In 2018, the SEC charged Floyd Mayweather for failing to disclose promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc. Mayweather’s promotions included a message to his Twitter followers that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…”.

A post on Mayweather’s Instagram account predicted he would make a large amount of money on another ICO and a post to Twitter said: “You can call me Floyd Crypto Mayweather from now on.” The SEC order found that Mayweather failed to disclose that he was paid $200,000 to promote the other two ICOs.

ALso, Khaled failed to disclose a $50,000 payment from Centra Tech, which he touted on his social media accounts as a “Game changer.”

Without admitting or denying the findings, Mayweather and Khaled agreed to pay disgorgement, penalties and interest. Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest. In addition, Mayweather agreed not to promote any securities, digital or otherwise, for three years, and Khaled agreed to a similar ban for two years. Mayweather also agreed to continue to cooperate with the investigation.