On Wednesday, March 10, 2021, the Securities and Exchange Commission, the federal agency tasked with regulating securities and protecting investors from market manipulation, issued a public warning about the risks surrounding investing in athlete and celebrity backed SPACs.
“celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors.” the agency wrote, “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.”
Special purpose acquisition companies, also known as SPACs, are the new investment trend amongst the world’s wealthiest and influential athletes. SPACs are a vehicle for private companies to transition to a publicly-traded one that can issue securities.
The traditional way a company goes public is through an initial public offer or IPO; in this process, a company announces it is going public before negotiating a deal or price for stocks, then it is up to the company to market and raise capital. Along with this, the prospective company must endure a rigorous audit by the SEC to verify its financial statuses and organizational structure. This process can take anywhere from two to three years.
Compared to an IPO, a SPAC is much less risky for a company that wants to go public. A SPAC is a blank check company with no operations the offers securities in exchange for cash. In this process, the private company signs a deal with the SPAC for a fixed amount of money then the two will merge within a two-year timeframe. When the two announce the merger, shareholders of the SPAC can either accept stock in the new company or redeem their shares at the original price of the offering.
Don Butler, managing director at Thomvest Ventures, simplifies the comparison to this “An IPO is basically a company looking for money, while a SPAC is money looking for a company,” Since these SPAC raise money to then buy a company, the influence of a high profile celebrity or athlete can entice investors to acquire a stake for association purposes.
A-Rod, Shaq, Colin Kaepernick, Serena Williams, and Steph Curry have all recently gotten into the SPAC game. Fitness company Beachbody agreed to go public in February through a merger with a SPAC advised by Shaq. Atlanta Braves and Formula One owner Liberty Media’s new SPAC raised $500 million in its January IPO.
According to Statista, In 2010, the North American sports market generated $49.9 billion U.S. dollars; today, it generates over $74 billion and is projected to rise to $83 billion by 2023. The sports market is divided into four main segments: ticket sales for live events, sponsorship, media rights, and merchandising.
This surge in revenue has found its way to the players; the 2020 average salary across the six major North American professional sports leagues was $3.76 million.
|Avg Salary||$8.32 mill||$4.03 mill||$3.26 mill||$2.69 mill||$410,000|
As salaries have grown, professional athletes are investing their money to create generational wealth. Professional careers are short-lived; the time frame for making this money is only a couple of years for most athletes. SPACs can provide a quicker return, but more risk is carried by the investor.
A recent successful SPAC in the sports industry has been DraftKings. In April of 2020, DraftKings and Diamond Eagle Acquisition went public on the Nasdaq after a successful SPAC merger. Diamond Eagle, the blank check company, raised $350 million for the merger and which would keep DraftKings management, including co-founder, Chairman, and CEO Jason Robins, in place. DraftKings opened up at $10.00 a share; today, the value of the stock is $69.30, which’s up 617% in one year.
New TV deals, the legalization of sports betting across the United States, and the return to full attendance at stadiums will continue to raise the value of the sports market in the coming years. Many will try to cash in on this growth, and the SEC’s warning is directed to the people who will invest because there is a big-name athlete or celebrity attached to the project.