Fraud Risk Implications of Celebrity SPACs

Abstract

The 2012 Jumpstart Our Businesses Act (JOBS) was passed arguably to facilitate greater access to capital by startup firms and to lower the costs of being public in an effort to make American listings more competitive with low cost exchanges abroad, such as London’s Alternative Investment Market (AIM). However, the JOBS Act established a number of exemptions for a new class of firms called Emerging Growth Act (EGC) companies, which lowered the governance and disclosure requirements. This opportunity for firms to access the public capital markets at low cost spawned a resurgence of vehicles known as Special Purpose Acquisition Companies (SPACs), whose only purpose in going public is to raise capital to do an acquisition that yields a formerly private company going public through a Reverse Takeover (RT). As all post-JOBS Act SPACs are incorporated as EGCs, they pose an additional fraud risk to the public, yet very little academic research has addressed this issue. In this thesis, I examine three research questions related specifically to celebrity SPACs. First, using a proprietary, hand collected data set consisting of Celebrity SPACs from 2015 to 2021, I examine the characteristics of post-JOBS Act Celebrity SPACs in terms of their underpricing, post IPO returns, institutional structures, and acquisition patterns. Secondly, I examine the governance characteristics of sample Celebrity SPACs. Third, I link the features of Celebrity SPACs to Fraud Diamond Theory risk factors. I anticipate that my findings will be of interest to regulators, practitioners, the academic literature on alternative investments, and to auditors.