Celebrities + Investments: Will SPACs help Artists Invest in Startups?

What do JAY-Z, Shaquille O’Neal, Ciara, Serena Williams, Steph Curry, and Colin Kaepernick all have in common? They are celebrities who are involved in SPACs, also known as Special Purpose Acquisition Companies. I am old enough (not too old though) to remember when celebrities who wanted to increase their portfolio or revenue streams would engage in licensing deals and strategic partnerships with clothing lines and other lifestyle consumer products. This is now seen as the territory for social media influencers. These days, A-list celebrities are desirous of a greater alpha and according to The New York Times, the ‘new celebrity flex’ is the SPAC.

The rise of SPACs

SPACs were birthed in the 1990s. They have been relatively unknown until quite recently, with consistently impressive growth from 2017. A sponsor, who can either be a wealthy individual (think Chamath Palihapitiya, net worth of $1 billion) or an institutional investor (investment bank), raises capital in an IPO (Initial Public Offering) with a company. This company is the Special Purpose Acquisition Company. The SPAC then acquires another company (perhaps an attractive startup) in what is called a ‘reverse merger’. After this acquisition, the objective is to have a fully operating, publicly-traded company.

SPACs are growing in popularity for a myriad of reasons. SPACs are a quick way to take a company public. They are viewed as beneficial in this age of very low interest rates and high market valuations.  SPACs enjoy a greater variety of sponsors and less due diligence than Initial Public Offerings and Direct Listings. Although the Securities Exchange Commission’s John Coates hinted that SPACS could possibly face the same level of scrutiny as Initial Public Offerings (IPOs), SPACs currently do not. A favorable aspect of a SPAC is that if the ‘blank cheque’ company does not find a company to acquire within 24 months, the sponsor reimburses the investors. 

SPACs raised in 2020 were 248. As of April 1^st 2021 there were 297 SPACs raised in the first quarter of 2021. Within the last 15 months, the market saw over 500 SPACs totaling 178 Billion USD. The average size of a SPAC is approximately 330 million USD. 

A word to the wise

On March 10^th 2021, the SEC, distributed a stern letter warning investors of the dangers of making investments which were promoted by celebrities. An excerpt of the memo stated, 

“Celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors…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…Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss.”

Ouch. 

At this point the majority of SPACs are not creating legitimate value for the investor.  Who is to blame? Financial practitioners have taken issue and pointed in the direction of some of the non-traditional sponsors of SPACs.  The quality of sponsors, critics opine, directly affects the quality of companies which are taken public through this process. Some SPACs are trading below 10 USD and there is much concern about the revenue and projections for the transactions.

Deutsche Bank’s Head of Technology Investment Banking, Ajah Shah, ventured to say to Bloomberg’s Emily Chang “75 percent of SPAC sponsors are really not that high quality”. Shah went on to highlight that there is a 6:1 ratio of bad companies to good companies taken public with SPACs.

“I see a lot of people who are kind of washed up or maybe ending their career or coming out of retirement or they are a celebrity and then they decide they are going to do a SPAC and you know they are just doing it to make the quick hit, they are not going to be at this every year for ten years.”

Jason Calacanis, Entrepreneur and angel investor

The real question here is whether a celebrity can bring a value that equates to successful traditional financiers and institutional investors. Should investors trust SPACs promoted by celebrities? In McKinsey & Company’s “Earning the Premium: A recipe for long term SPAC success”, it was found that between the year 2015 and 2019, SPACs which were managed by C-suite level individuals outperformed SPACs which were led by those without C-Suite level experience by forty percent. 

The celebrity factor

Celebrities do not work in silos. Additionally, celebrities have their unique selling proposition. They have a certain level of expertise in particular areas which ought to be leveraged. Their fame is expected to be used as a marketing tool which would attract investors. 

Shaquille O’Neal lends his expertise in sports and entertainment as strategic advisor to the TMT-focused Forest Road Acquisition I and Forest Road Acquisition II. The first Acquisition took a company which offers in-home fitness and weight-loss products called Beachbody public. Shaq is not new to great investments. Lest we forget he invested in Google’s Series A in 1999. 

Steph Curry and Serena Williams invested in a fitness startup called Tonal with a SPAC called Dune Acquisition Corp. Serena Williams is involved in Jaws Spitfire Acquisition Corp. Colin Kaepernick formed a social justice SPAC called Mission Advancement Corp. Ciara sits on the board of directors for Bright Lights Acquisition Corp., which promises to focus on consumer products, media, entertainment and sports sectors. 

JAY-Z is affiliated with cannabis based company, Caliva which was involved in a SPAC and acquired by Subversive Capital Acquisition Corp. The new operating, value creating company, called The Parent Company aims to “dominate and consolidate the fragmented cannabis market”. As of January 2021, The Parent Company had 381 million USD with which to operate. 

Behind the Curtain

Just like traditional financiers, these celebrities have business management teams. Look to these management teams to have extensive experience taking businesses public, liaising with institutional investors, and executing business plans. “These newer SPACs increasingly feel like an inside joke for the super rich… believe me, you don’t want to invest in someone else’s inside joke.” 

As with all investments, the investor must investigate the background of the transaction; assess the sponsors and key players responsible for the success and fully consider all possible costs, risks, and benefits. It is only a matter of time before we see a Kylie Jenner-sponsored SPAC. Wait for it.

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