Category: SEC (USA) Alerts

Celebrity Involvement with SPACs – Investor Alert

Posted on by Trading Scam News Editor

The SEC’s Office of Investor Education and Advocacy (OIEA) cautions investors not to make investment decisions related to SPACs based solely on celebrity involvement. 
Celebrities, from movie stars to professional athletes, can be found on TV, radio, and social media endorsing a wide variety of products and services.  Sometimes they are even involved in investment opportunities such as special purpose acquisition companies, or SPACs, as sponsors or investors.  Those celebrities may even be well-known professional investors. 
However, 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 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. 
SPACs have become a popular vehicle for transitioning a private company to a publicly traded one.  A SPAC is a blank check company with no operations that offers securities for cash through an initial public offering (IPO).  SPACs then have a specified period of time—typically two years—to identify and merge with a private operating company.  This business combination is often used as an alternative means of taking the acquired company public, rather than through a traditional IPO. 
Special purpose acquisition companies (SPACs).  To learn more about SPACs and what to consider before investing in a SPAC, see our Investor Bulletin about what you need to know.
However, SPAC transactions differ from traditional IPOs and have distinct risks associated with them.  For example, sponsors may have conflicts of interest so their economic interests in the SPAC may differ from shareholders.  Investors should carefully consider these risks.  In addition, while SPACs often are structured similarly, each SPAC may have its own unique features, and it is important for investors to understand the specific features of any SPAC under consideration.
Differing economic interests.  SPAC sponsors generally acquire equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market.  As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combination and may have an incentive to complete a transaction on terms that may be less favorable to you.  To learn more, see our Investor Bulletin.
Even if a celebrity is involved in a SPAC, investing in one may not be a good idea for you.  Before investing, always do your research, including these three steps:
Check out the background, including registration or license status, of anyone recommending a SPAC, using the search tool on Investor.gov;
Learn about the SPAC sponsors’ backgrounds, experience, and financial incentives, how the SPAC is structured, the securities that are being offered, the risks associated with an investment in the SPAC, plans for a business combination, and other shareholder rights by carefully reading any prospectus which may be available through the SEC’s EDGAR database; and
Consider the investment’s potential costs, risks, and benefits in light of your own investment goals, risk tolerance, investment horizon, net worth, existing investments and assets, debt, and tax considerations.
Never invest in a SPAC based solely on a celebrity’s involvement or based solely on other information you receive through social media, investment newsletters, online advertisements, email, investment research websites, internet chat rooms, direct mail, newspapers, magazines, television, or radio.
Additional Resources
What You Need to Know About SPACs – Investor Bulletin
Investor Alert: Celebrity Endorsements
SEC Statement Urging Caution Around Celebrity Backed ICOs
Report possible securities fraud to the SEC.  Ask a question or report a problem concerning your investments, your investment account, or a financial professional.
For additional investor educational information, see the SEC’s website for individual investors, Investor.gov.
Call OIEA at 1-800-732-0330, ask a question using this online form, or email us at [email protected].
Receive Investor Alerts and Bulletins from OIEA email or RSS feed.  Follow OIEA on Twitter.  Like OIEA on Facebook.

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Environmental, Social and Governance (ESG) Funds – Investor Bulletin

Posted on by Trading Scam News Editor

Feb. 26, 2021
Funds such as mutual funds and ETFs that focus on environmental, social, and governance principles (ESG Funds) have gained popularity with investors over time. Investors may hear about these funds from financial professionals, from investment-focused online sites, or even from popular media. The SEC’s Office of Investor Education and Advocacy is issuing this bulletin to educate investors about ESG Funds, including important questions to ask if considering whether investing in them is right for you.
What is an ESG Fund?
Funds, like ETFs and mutual funds, may consider a wide range of factors that are consistent with their objectives and strategies when selecting investments. This can include ESG, which stands for environmental, social, and governance.
ESG investing has grown in popularity in recent years, and may be referred to in many different ways, such as sustainable investing, socially responsible investing, and impact investing. ESG practices can include, but are not limited to, strategies that select companies based on their stated commitment to one or more ESG factors —for example, companies with policies aimed at minimizing their negative impact on the environment or companies that focus on governance principles and transparency.  ESG practices may also entail screening out companies in certain sectors or that, in the view of the fund manager, have shown poor performance with regard to management of ESG risks and opportunities. Furthermore, some fund managers may focus on companies that they view as having room for improvement on ESG matters, with a view to helping those companies improve through actively engaging with the companies.
Funds that elect to focus on companies’ ESG practices may have broad discretion in how they apply ESG factors to their investment or governance processes. For example, some funds integrate ESG criteria alongside other factors, such as macroeconomic trends or company-specific factors like a price-to-earnings ratio, to seek to enhance performance and manage investment risks. Other funds focus on ESG practices because they believe investments with desired ESG profiles or attributes may achieve higher investment returns and/or encourage ESG-related outcomes. For example, some ESG funds select companies that have shown their commitment to a particular ESG factor, such as companies with policies aimed at minimizing their negative impact on the environment.  Some funds may implement shareholder voting rights in particular ways to achieve ESG goals, while others may only focus on selecting investments based on ESG criteria.
Fund managers focusing on ESG generally examine criteria within the environmental, social, and/or governance categories to analyze and select securities.
The environmental component might focus on a company’s impact on the environment—for example, its energy use or pollution output. It also might focus on the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.
The social component might focus on the company’s relationship with people and society—for example, issues that impact diversity and inclusion, human rights, specific faith-based issues, the health and safety of employees, customers, and consumers locally and/or globally, or whether the company invests in its community, as well as how such issues are addressed by other companies in a supply chain.
The governance component might focus on issues such as how the company is run—for example, transparency and reporting, ethics, compliance, shareholder rights, and the composition and role of the board of directors.
An ESG fund portfolio might include securities selected in each of the three categories—or in just one or two of the categories. A fund’s portfolio might also include securities that don’t fit any of the ESG categories, particularly if it is a fund that considers traditional fundamental analysis or other investment methodologies consistent with the fund’s investment objectives.
ESG investing is not limited to ETFs and mutual funds. Other types of investment products, like exchange-traded products that are not registered under the Investment Company Act of 1940, might also consider ESG factors in selecting an investment portfolio.
Be sure you understand what you are investing in.
If you are considering investing in an ESG Fund, you should know that all ESG Funds are not the same. It is always important to understand what you are investing in, and to be sure a fund, or any other investment, will help you achieve your investment goals. In addition, you will likely want to consider whether a fund’s stated approach to ESG matches your investment goals, objectives, risk tolerance, and preferences.
Here are some things to consider:
Some factors are not defined in federal securities laws, may be subjective, and may be defined in different ways by different funds or sponsors.  There is no SEC “rating” or “score” of E, S, and G that can be applied across a broad range of companies, and while many different private ratings based on different ESG factors exist, they often differ significantly from each other.
Some funds may focus on ESG investing, while others consider ESG factors alongside other more traditional factors.
Different funds may weight environmental, social, and governance factors differently. For example, some ESG Funds may invest in companies that have strong governance policies, but may not have the environmental or social impact you may want to encourage through your investment in the fund.
Different funds may focus on different specific criteria within a factor. For example, one fund may focus on shareholder rights for “governance,” while another focuses on board of directors’ diversity.
Some ESG fund managers may consider data from third party providers. This data could include “scoring” and “rating” data compiled to help managers compare companies. Some of the data used to compile third party ESG scores and ratings may be subjective. Other data may be objective in principle, but are not verified or reliable.  Third party scores also may consider or weight ESG criteria differently, meaning that companies can receive widely different scores from different third party providers.
You can find more information about how a fund incorporates ESG and how it weighs ESG factors in the fund’s disclosure documents. The fund’s prospectus contains important information about its investment objective and strategies, and its shareholder report contains both a list of its top holdings and a graphical representation of its holdings by category. These documents, and in some cases supplemental information, are available on funds’ websites.
Some funds that don’t have “ESG” in the name may still incorporate elements of ESG investing into their portfolios. Consider comparing an ESG Fund’s portfolio to other fund portfolios to be sure you are investing in a fund that is consistent with your investment goals.
Funds’ websites may also have policy statements that more fully explain their ESG practices, and other information such as customized statistics about the relevant ESG attributes or approaches used by the fund.
Understand What an ESG Investment Strategy Could Mean for You
As with any investment, you could lose money investing in an ESG Fund.
A portfolio manager’s ESG practices may significantly influence performance. Because securities may be included or excluded based on ESG factors rather than traditional fundamental analysis or other investment methodologies, the fund’s performance may differ (either higher or lower) from the overall market or comparable funds that do not employ similar ESG practices.
What this may mean for you: ESG funds may perform differently than other funds without the ESG parameters.
Certain industries may be excluded from some ESG Fund portfolios. However, some ESG Funds may still invest in “best in class” companies within commonly excluded industries. For example, an ESG Fund could invest in a certain company within an industry where companies commonly have a large carbon footprint because that company demonstrated a commitment to improving its policies and practices on environmental issues. Moreover, companies which may score poorly on one ESG factor (such as carbon footprint) could be selected because they score well on another ESG factor (strong governance) or because the fund manager has plans to engage with the companies to improve their performance on ESG issues.
What this may mean for you: One of the most important ways to reduce the overall risk of investing is to diversify your investments. You should read the fund’s disclosure documents closely to be sure you understand what the fund is—and is not—invested in, and how its ESG orientation may affect its risk.
Some funds that consider ESG may have different expense ratios than other funds that do not consider ESG factors.
What this may mean for you: You should always evaluate a fund’s expenses. Paying more in expenses will reduce the value of your investment over time.
Be sure to consider all of your goals when weighing any potential benefits and risks to making a particular investment.
Before you invest in an ESG fund
✓ Carefully read all of the fund’s available information, including its prospectus and most recent shareholder report. You can get this information by looking at the fund’s filings on the SEC’s EDGAR database, from your investment professional, or directly from the fund.
✓  Understand the fees and expenses you will pay for the fund, and compare them to other investment options.
✓ Be sure that the fund’s investment strategy is consistent with your goals.
✓ Ask Questions:
Is ESG a core component of the investment selection process, or is it one of many factors that are considered to select investments?
To what extent does the fund focus on ESG factors versus more traditional factors?
How does the fund weight each of the three ESG factors within its ESG portfolio holdings?
What specific criteria within a factor does the fund use when determining its portfolio holdings?
How do the fund’s fees and expenses compare to other investment options?
What types of investments do you expect or desire the fund to be invested in, and what types of investments do you expect or desire the fund NOT to be invested in?  Compare those expectations with published fund holdings to better understand whether the fund’s investment strategy is consistent with your preferences.

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