Why Are Celebrities Investing in SPACs? Should I Consider It, Too?
T his past year, the volatility of the pandemic and independent Reddit-based investors bidding up shares of GameStop has turned Wall Street toward a trend of nontraditional investing and trading — and it continues. Starting as early as last summer, celebrities and big-time Wall Street players began investing more and more money in special purpose acquisition companies (SPACs). SPACs are shell corporations with no assets. A pool of investors sets up one of these companies with the sole purpose of raising money through an initial public offering (IPO) to eventually acquire a private company and take it public. SPACs don’t have products or services. Its only asset is typically the money raised in its own IPO. SPACs are usually given two years after its IPO to find a company to acquire, although investors rarely know what business the SPAC will acquire. (Shareholders do have to vote to approve the acquisition.) As CNBC explains, once acquired, shares of that business can be swapped for the SPAC shares (a SPAC merger), or investors can redeem their money plus interest. If a business cannot be acquired within an established time frame, the investors get their money back plus interest. Would you like to be a Campbell Wealth Management Ambassador? Would you like access to exclusive events?
Sounds lucrative, right? It can be, but not for everyone. For a long time, SPACs were seen as last-ditch efforts on the part of small start-ups that couldn’t afford to raise money on the open market. Many investors argued that if a business couldn’t raise these funds, how well could they actually perform once public? Plus, CNBC also reports that a five-year study found the average return on investment from SPAC mergers was generally less than returns from IPO investors. This should make investors wary, especially since they have no idea which company a SPAC might acquire. The risk is much higher than traditional investing. However, recent SPAC acquisitions of big corporations like DraftKings, the online sports gambling website, and a space exploration company, Virgin Galactic, have some investors hopeful. This could shift the thinking on the usefulness of SPACs and attract larger businesses to this arrangement. A SPAC may or may not be right for you, but that’s your decision to make. If you want to learn more about SPACs, speak with a trusted financial advisor to assess your risk.
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