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Special purpose acquisition companies, or SPACs, were once an obscure investment as far as average investors were concerned. But in recent years, numerous celebrities, athletes and politicians have propelled SPACs into the mainstream with endorsements of these so-called “blank check” companies.

Sarah Zechman

A SPAC is a publicly traded company created with the intent to buy a private company. The shell corporation raises capital through an initial public offering but has no operations and virtually no assets or liabilities. Disclosures about the company and its intentions are thin, so investors essentially contribute money with little idea of what they’re investing in. 

“Their disclosures don’t carry a lot of information as, at the time of the IPO, SPACs have virtually no assets or liabilities, no past performance and do not have any specific targets in mind for the merger,” said Sarah Zechman, a Leeds School of Business accounting professor who recently co-authored a study on SPACs. 

With such scant information available, how do SPACs reel in investors? Celebrity sponsors help—an arrangement that has caught the attention of the Securities and Exchange Commission.

“While most, if not all, SPACs have business professionals on their team, many also include celebrities,” Zechman said. “It is the presence of these celebrities that has caused the SEC to be concerned that less sophisticated investors may be misled. One can easily envision less knowledgeable investors overvaluing the presence of musicians, professional athletes and famous politicians.”

A recent high-profile example is former President Donald Trump’s Truth Social SPAC, which went public in March. Other big names who have backed SPACs include Shaquille O’Neal, Jay-Z, Paul Ryan, Ciara, Peyton Manning, Andre Agassi and Steffi Graf.

The , also co-authored by Leeds assistant accounting professors Andrea Pawliczek and Nicole Skinner and published in March 2024 in the American Association of Accounting’s The Accounting Review, examines how SPAC disclosures and celebrities influence capital raised when there is little information available about these companies—and when their performance has historically been poor compared with traditional IPOs.

“It’s a bit of a gamble for investors,” Zechman said. “You're giving a management team your money and you're hoping they do well with it.”

Initially the risk to investors is minimal, Zechman said, until the SPAC makes an acquisition, which it typically must do within a two-year period. Until then, investors’ money is held in a trust, and if a deal doesn’t occur by the deadline, the SPAC dissolves and investors get their money back. Shareholders get to vote on any proposed merger or acquisition, and they can withdraw their money if they disagree with the deal (although more often, investors opt to sell their shares on the market). 

“There are actually a lot of protections for investors up until the merger goes through, but once the acquisition happens, there's very high risk for investors,” Zechman said. The researchers cited a previous study that shows the average returns for SPACs two years after a merger are 1.75% below market on a monthly basis from 2003 to mid-2020.

Misaligned incentives

A SPAC’s management team has strong incentives to complete a deal even if it lacks value for shareholders, according to the research paper. That’s because sponsors receive 20% equity in the SPAC when the deal goes through. If it doesn’t, sponsors forfeit all shares. The paper also points out that the two-year deadline “can artificially constrain options and create incentives for suboptimal deals.”

“The management team puts in a little bit of cash, but what they're really being compensated with is ownership,” Zechman said. “So their incentives are to do a deal because if they don't, they don't get the 20%. These incentives are more misaligned than those of managers in traditional IPOs.”

The SEC has raised concerns about investors not understanding these incentives. Citing the study by Pawliczek, Skinner and Zechman, in January the SEC adopted new rules to enhance disclosure requirements for SPACs about conflicts of interest, sponsor compensation and other information.

The increased regulation and scrutiny combined with less-favorable market conditions for IPOs have put the brakes on SPACs, which were on a tear at the beginning of the decade. In 2020, they accounted for more than half of IPOs, raising over $70 billion total and an average of $300 million each, according to Goldman Sachs. As of the end of March, only about a third of 2024’s IPOs are SPACs. 

In its first-quarter 2024 Capital Markets Watch, PricewaterhouseCoopers noted the momentum for SPAC IPOs and SPAC merger announcements and completions has slowed, with the new SEC rules continuing to impact the volume of transactions.

Celebrity appeal

The study found evidence that disclosure helps raise SPAC funds, but in a different way than for traditional IPOs. Disclosures with fewer numbers and “less litigious and uncertain language in the risk factor disclosures are all associated with funds raised,” according to the paper.

The study also found that SPACs sporting managers with experience in the SPAC arena, former CEOs and celebrities raise more funds than those without. “This is consistent with reputation playing an important role for investors when uncertainty is high and information is limited,” the paper said.

Having a celebrity on board didn’t affect the performance of these SPACs, however.