The U.S. Securities and Exchange Commission (SEC) often warns investors against falling for the madness of crowds. Observing the behavior of gullible fans, the SEC has flagged celebrity endorsements, from cryptocurrencies to special purpose acquisition vehicles (SPACs).
In one such alert earlier this year, the SEC cautioned: “Celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors. Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It’s never a good idea to invest in something just because someone famous says it’s a good investment.”
Such warnings come as many respected veteran investors caution against these vehicles. On SPACs, financial conduits used to make private companies public, research shows that winnings go mainly to the sponsors and original buyers of warrants, not shareholders.
Cryptocurrency —a great intellectual experiment in blockchain technology with no use value — has been ridiculed by investors such as Warren Buffett, Carl Icahn and Sam Zell. Even prominent boosters — including Mark Cuban and Elon Musk — have wavered at times in their support.
But other influencers tout these new vehicles, stoking interest. A cryptocurrency publication recently published a list of celebrity bitcoin
holders — including Kanye West, Maisie Williams (Game of Thrones), and Snoop Dogg — their reported ownership leading the publication to conclude that “we know for sure that bitcoin has value in the eyes of the most influential people on the planet.”
But as the SEC warns, such involvement is speculation, not validation, and cannot substitute for an investor’s independent assessment.
When celebrities sponsor SPACs, some investors believe that their presence increases the value of the investment. But this is often an illusion, as many of these big-name backers have no proven track record.
Some celebrity SPAC supporters do have impressive business or investing experience, including: Roger Staubach, the football star who built a real estate empire; Serena Williams, the tennis pro who runs a venture capital fund, and Shaquille O’Neal, the basketball legend who was an early investor in Alphabet’s Google. But even experience cannot assure value to SPAC shareholders, independent of the terms of the transaction.
The financial services industry has long known the value of celebrity endorsements, whatever a star’s business background. TD Ameritrade, for example, ran a long series of ads featuring “Law & Order” actor Sam Waterson, not otherwise known for his investing acumen. Financial firms also have turned their own employees into celebrities to boost business. During the internet boom of the late 1990s, financial analysts Henry Blodget of Merrill Lynch and Jack Grubman of Salomon Smith Barney appeared regularly on CBNC to tout hot stocks they privately trashed. The SEC cracked down on such practices at 10 major firms in a 2003 ruling.
Dubious operators find celebrity promoters especially useful. In 2017, heiress Paris Hilton boosted little-known cryptocurrency LydianCoin to prominence, before reversing herself as its CEO became embroiled in legal problems that landed him in jail. The next year, when the SEC exposed the fraud of cryptocurrency firm Centra Tech’s initial coin offering, it penalized the company’s celebrity boosters, boxer Floyd Mayweather Jr. and media personality DJ Khaled. In 2020, actor Steven Seagal settled SEC charges for concealing payments received for boosting another crypto firm, Bitcoiin2Gen.
These stories and the SEC’s warnings emphasize that for investors, discernment is an essential skill. You must develop judgment to recognize illusion, to distinguish fact from fiction, signal from noise and philosophy from punditry.
Currently, discernment appreciates the difference between crypto as a great experiment in blockchain technology from its absence of utilitarian value and the difference between the sure value of SPAC warrants from the dubious value public shareholders receive in a merger.
Yet the SEC is battling an ancient problem. Celebrity boosters stoked the South Sea Bubble in the early 18th century, as influential writers of the time including Daniel Defoe and Jonathan Swift endorsed the hyperinflated shares. The brilliant scientist Isaac Newton bought heavily early in the runup, then skittishly sold midway in, before buying again just before the bubble popped, losing all. Newton lamented: “I can calculate the motions of heavenly bodies, but not the madness of people.” The SEC is right to remind us about this immutable law of human nature.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of The Essays of Warren Buffett: Lessons for Corporate America. For updates on his research about quality shareholders, sign up here.