Beginner’s Guide to SPACs

Special purpose acquisition companies (SPACs) are companies formed for the sole purpose of raising capital in order to acquire an existing company. They raise capital through an initial public offering (IPO) and are often referred to as “blank check companies” as they IPO without any business operations.

SPACs are usually formed by a group of investors with expertise in one field and the intention of targeting a company in that business sector. Although during the IPO process they don’t release their targets. The money they raise through their IPO is put into an interest bearing trust account that can only be used to complete an acquisition or return money to investors if they fail to do so. After their IPO, SPACs generally have two years to acquire a target or they face liquidation.

How to invest in SPACs

COMMON STOCK (SHARES) – A share of the SPAC will become a share of the acquired company post-merger. Or if the company fails to merge within the given timeframe then all shares are redeemed for a proportional portion of the cash held in the cash account. This gives SPACs a $10 floor as this is what must be paid out per share if the SPAC fails to merge.

So by holding a share of the SPAC your holding $10 (plus interest gained) and the chance to own a share of the company acquired by the SPAC if the merger takes place.

WARRANTS – Warrants give the owner the right but not the obligation to buy a share of the underlying company at a predetermined price (typically $11.50). Close to all SPAC warrants have an expiry date set to five-years after any merger has taken place. However if no merger takes place then the warrant expires worthless.

Most SPACs state that warrants can only be exercised one year after IPO or 30-days post-merger. It is often also stated that if the price of the common stock trades above a certain price (usually above $18 for 20 out of 30 consecutive days) then the company can redeem the shares. Either for cash (the $11.50) or a cashless basis where the owner of the warrant is given a fraction of the share. Warrants have a lower capital requirement to trade and come with a higher risk and reward, but the speculative nature of warrants can lead to wild price swings. To understand how warrants work better read here.

UNITS – During the IPO, SPACs usually offer units almost always at $10 each. A unit consists of one share of common stock and a warrant that lets you purchase a share of common stock. Generally exercisable at $11.50. The warrant in the unit can be a whole warrant, 1/2 a warrant or 1/4 a warrant.

Weeks after the IPO, the common stock (shares) and Warrants included in the SPAC units can be separated and traded individually. So the common shares, Warrants and unseparated units all trade with individual tickers.

SPAC Tickers

SPAC shares usually trade with a four symbol ticker – for example ICTT

SPAC Units trade with the same ticker with a “U” added to the end – for example ICTTU

SPAC Warrants trade with a “W” at the end – for example ICTTW

Post-merger the SPAC and target company will trade under the target company ticker. This includes all warrants and units, for example if ICTT merged with a company with the ticker ABC the new company would trade common shares under ABC, warrants under ABCW and units under ABCU.

The Advantages of Investing in SPACs

High upside with limited downside – When investing in a SPAC you can get massive returns on investment depending on the target company acquired and you have limited downside as if the company fails to merge you still get at least $10 back per share. An example would be the VITQ – NKLA merger. VectoIQ Acquisition Corp (VITQ) traded around $10 per share before it sky rocketed to $80 a share upon announcing it would merge with NKLA. In a world where they failed to find a target to merge with, the floor for the stock would still have been $10.

Warrants increase the upside – In the same example above where NKLA was trading at $80, exercising a warrant would let you buy the share at $11.50 and sell it at $80. That is a profit of $68.50 per warrant exercised. If you bought warrants before the announcement for cheap around $2 a warrant. Then you’ve made a return of over 3400%

The risk of investing in SPACs

Failure to acquire a target – After the SPAC IPO, the common stock usually trades at a slight premium. You are likely to buy the share at $11 or $12 and if the SPAC fails to merge you will get $10 back per share giving you a 10%+ loss on investment.

Opportunity Cost – SPACs have two years to find a target. During this period the value of units wont change much. This means your capital will be locked in a position generating little to no returns. During this time the capital could have been better allocated in other investments.

Redemption risk for Warrants – If the common stock trades above a certain price for a sustained period of time the warrant may be redeemed by the company for a nominal consideration. This forces public warrants to be exercised making them lose value,

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