Every SPAC Question You've Ever Had

What is a SPAC?


In simple terms: a rich person's fund that the public has access to through the stock market. Ever hear of Venture Capital or Private Equity? Usually those are only for the rich guys... but a SPAC allows the little guys like us to get involved. Here's how it works: 1. Rich guy puts $ into a shell company LLC 2. Rich guy takes shell LLC and brings it onto the stock market through an IPO 3. The LLC is now publicly traded like a stock (Robinhood, Etrade, Etc) 4. Rich guy finds a dope private company to merge with the shell LLC 5. Private company merges with the SPAC, the SPAC dissolves, and now the private company is on the stock market People like you and me can invest into the SPAC with the hopes they merge with a promising private company. The rich guy's money + the public stock market money adds extra juice to the SPAC and makes it possible for the private company to slide onto the stock market more efficiently. This is why I like to call SPACs an IPO in a Box or Fully Baked IPO. Technically, SPAC stands for Special Purpose Acquisition Company and you can read the boring over-complicated definition if you click the link. Another way to describe a SPAC is a "Blank Check Company," meaning that the company has a blank check to spend on any privately held company they want. Basically, rich kids in a candy store. Example: Imagine a bunch of ex automotive CEOs and executives get a few of their rich buddies together and they decide to start a $700m fund to acquire/merge with a privately held company. They deposit their $ in an LLC and form a SPAC by bringing it through the IPO process. This then allows the SPAC to be traded on the public stock exchange. Anyone can download Robinhood and invest in it with the click of a button. The public, me and you, can now invest into their "blank check company" and trust that they'll acquire/merge with a juicy private company. Nikola, Fisker, Quantumscape... these are all automotive companies that went public via a SPAC.




Define "Blank Check" company


SPACs are commonly referred to as "Blank Check" companies. In other words, I write you a 'blank check' and you spend it how you want. When you invest in a SPAC, you invest in the industry titans or billionaires running it. You're trusting them to make a killer acquisition and get a deal done. Most SPACs don't have a pretermined target company... so they say...




Can SPACs fall below $10/share BEFORE the merger?


Yes. If it falls below $10/share during the SPAC stage, at the very least you can redeem the guarenteed redemption value of between $10-11. This number gradually increases due to the interest bearing trust. Example: If the SPAC is at $9.85 and the redemption value of the stock is $10.05, you can redeem for $10.05 ( Increase of $0.20/share) if you wanted to cash out on the set redemption date before the merger. In reality, this would never happen and the lowest SPACs go is the redemption price (approx $10/share + Interest Earned).




What happens to a SPAC after it merges?


When a SPAC launches through an IPO, they usually choose a catchy ticker name like "DEAC" or "VTIQ). Once they merge with a private company, they change their names to a more relevant ticker: VTIQ -> NKLA, DEAC -> DKNG. The SPAC is now merged with the company and the SPAC Ticker is dissolved. You are now an investor in the new company's stock at (hopefully) an early price.




How much time do SPACs have to merge with a private company?


24 months from the IPO date. They can file extensions if they have a deal in the works. As SPACs become more competitive, we expect to see this timeline shrink to less than 12months. in 2020, the average SPAC only searched for 4.6mo and it took another 3.2month for the ticker to change. During that 7.8months, your floor price is approx $10/share + Interest Earned




What happens if a SPAC doesn't find a company in 24 months?


They can file an extension if they have a deal in the works. If they don't find a deal in time, common share holders get their redemption price: approx $10/share + Interest Earned




What is the IPO price of a SPAC? Does every SPAC begin at $10/share?


Every SPAC launches with a X number of shares at $10/unit. This is where it gets a little complicated so keep reading the FAQs to learn about Units & Warrants. Basic Example: Goldman Sachs launched a $700m SPAC called GSAH. GSAH IPO'd with 70m shares at $10/share = $700m.




Can SPACs fall below $10 AFTER the merger?


Yes. Post merger, the SPAC is dissolved and the new company is now a stock on the public markets. If investors think that the new company is junk, that new stock can go to $0.




When does the merger vote happen?


On average in 2020, it took a SPAC 4.6months to find a target company. After they signed a definitive agreement to merge, it takes on average 3.2months for the merger to complete. A few days before the merger happens, the SPAC will give you 2 votes: 1. Do you want to redeem your SPAC at $10/share + interest earned? 2. Do you approve of this merger? Crazy thing is they're mutually exclusive votes, you can vote 'yes' on one and 'no' on the other. If you vote yes twice and decide to hold, you're hoping the merger goes through and then the fun begins. If you redeem, the SPAC is required to give you back minimum $10/share + interest accrued. Given the size & quick timelines of the new SPACs, this redemption price is usually around $10.10-$10.20.




What are Warrants & how do they work?


First we need to understand what an 'option' is. Simply put, an 'option' is literally the option buy an existing company at a future price. You pay a much smaller amount and hope the stock reaches a certain price. If that price is reached, you can execise your option and turn it into the stock.....Warrants are similar but are used to raise money. A warrant is the option to buy a common share at a certain price. Usually, the stock needs to stay above $18/share for 20 days in a 30 day trading period and then the warrant holders can exercise their shares at the 'strike price'. The strike price is usually $11.50. So here's some basic warrant math: Example: You buy 100 warrants at $1/each with the option to convert to common shares at $11.50 post merger. The SPAC announces a deal and the common shares go up to $20/share. Because it held the minimum of $18/share for 20 days, I can now convert my shares to the common stock at the $11.50/share strike price. $1/warrant + $11.50 strike = $12.50/share If the current stock is at $20, then your profit is $7.50 a share. Basically, you just paid $12.50 for a $20 stock. Warrants are deceiving because 1 warrant DOES NOT ALWAYS EQUAL 1 share. Some warrants are 1/4 shares, some are 3/4 shares. So basically you’ll need 4 of the '¼ warrants' to convert it into 1 share. Always look before buying and then multiply to figure out the 1:1 ratio. Example: A $.50 warrant that has ¼ share rights is really a $2/ full warrant for 1 share [$.50w * 4 = $2.] Another thing to mention is that you can trade a warrant like a stock. Warrants usually start in the pennies per share because they are significantly riskier than SPAC common shares. Unlike common shares that have a bottom of $10/share + interest, warrants can go to $0 and rip out the carpet from underneath you. Many experienced traders prefer warrants because it allows them to front less money while giving them an option to get in the game at a later date. You also have the ability to sell the warrant like a stock. Ex: If you have 1000 warrants at $1/share, thats $1k. If the warrants double to $2/share, you can sell your warrants for a 100% gain or you can hold them with the hopes of exercising at a later date.




Are SPACs the same as Stocks?


SPACs trade like stocks. The key difference is that the SPAC is a "blank check" or "shell" company while most stocks are revenue earning operating companies.




Are SPACs better than going through a traditional IPO?


SPACs have reinvented the IPO. Here are a few reasons: Reasons include: -SPACs merge onto the stock market with minimal financials, so they do the IPO dirty work in advance. -Takes less time than traditional IPOs -Seamless- no time for public scrutiny -More collaboration btwn SPAC and Private Company -Raises capital upfront -Add industry titans to the company board after SPAC merger In a few words, a SPAC is an IPO in a box and allows a private company to grab that box and become publicy traded much easier while adding industry titants to their board.




What is Private Equity (PE)?


Private Equity (PE) is when an investment fund buys a piece of equity in a private company. They capitalize, restructure, or even carve out companies to make them more valuable. Theyse guys have billions upon billions of dollars to spend. Ever see those massive 300ft+ yachts all around the world? It doesn't matter how they all made their money... they use private equity/venture capital investments to multiply it. In a small way, SPACs are allowing the little guys like us to be PE/VC guys.




What is Venture Capital (VC)?


Venture Capitalists (VC) are rich ass investors or private firms that invest into companies at early stages and aim for substantial returns on their investment. VC is a form of Private Equity... they invest and get some equity in return. For many years, VC guys have brought all the money to the table and were able to get in early on companies like Uber, AirBnB, Snapchat, Facebook, and endless other success stories. When you’ve got billions in cash, you can make deals. Nowadays, SPACs make us feel like the VC guys! Get in on the ground floor with them to make safe & lucrative investments.




What does "cash in trust" mean?


When a SPAC IPOs, the rich guys must put their cash in an interest bearing trust account. This is why the floor for us retail investors is approx $10/share + interest earned. Ex: Goldman Sachs has $700m in an interest bearing trust account to secure GSAH's 70m shares at $10/share. If GSAH doesn't find a target or if the target is junk, we can redeem our $ at approx $10/share + interest earned. Money held in an interest bearing account gets 1-2% interest from safe securties/bonds/etc. This interest is then added to the redemption price. The redemption price grows with time so the longer it take for the SPAC to find a deal, the more interest earned and higher the redemption price.




What is a Letter of Intent (LOI)?


Just a signed peice of paper that means absolutely nothing except "we're talking." It is a non-binding offer letter to show what the SPAC is willing to pay/do for the target company. In theory, an LOI should set the ground rules for the terms in a contract. Example: I want to buy yor company. Instead of making you an offer over the phone, I send you an LOI detailing what I want to offer. If you are interested, you sign this non-binding paper and our lawyers begin to hash it out. LOIs are used across many industries from real estate to VC. It’s just a starting point for negotiating the final contract.




What is a Definitive Agreement?


A lot better than an LOI. A document defining the final terms of an agreement between buyer and seller. This is a BINDING document that says here's what the deal is, next steps are voting on the merger, changing the ticker, and getting this deal into the endzone.




LOI vs Definitive Agreement


An LOI is non-binding and sets the foundation for negotiation. A Definitive Agreement (DA) is a binding contract. Just read this example: We start a SPAC and want to merge with your super sexy tech company. We show them our $500m trust and they like our baller management team. Now that we know that this deal could work, we send the tech company an LOI. The LOI states basic terms: price, share distribution, board seat assignments, etc. Now that we have our LOIs signed, we send the LOI to our overpriced lawyers to negotiate. Once we agree on the nitty gritty, the lawyers draft a Defintive Agreement detailing every little thing. This is binding and we are now both expected to get this deal to the endzone.




What is a PIPE?


Private Investment in Public Equity. When a SPAC launches, a lot of the institutional guys missed their chance to get in early. So let's say a SPAC finds an increadible company to merge with but they don't have enough in their trust account to bag em.... They raise additional capital via a PIPE. As a SPAC investor, I always follow the PIPE even though it usually means further dilution for us retailers. The reason I follow the PIPE is because if big institutions are throwing down hundreds of millions (potentially billions)... then this company is an all star company. Also, I usually choose SPACs that I know have access to major PIPE investors. SPAC legend Chamath Palihapitiya doesn't always use his SPACs to invest, he uses a PIPE. For Desktop Metals (DM) and MP Materials (MP), Chamath partnered with different SPACs and lead their PIPEs for additional capital.




Units, Warrants, Commons - How they work


By now, you've realized that I said the floor is "around $10" and the reason for that is because of Units. When a $200m SPAC IPO's, it sells 20m units at $10/share. Those units are made up of 1 common share + fraction of a warrant. After 45-52 days after the IPO, the units will split into separate trading of commons and warrants. Commons have a floor of about $9.80-10.10. Warrants are usually $.50-$2/warrant and serve as an option to buy the stock after certain conditions are met. To subscribe to the 'can't lose' strategy of SPACs, stick to trading warrants because their floor is usually around $10/share. If you're looking for something more complex, keep reading. I feel obligated to disclaim that if you decide to gamble on warrants and lose all your money, I feel your pain but don't blame it on me. I'm cautiously aggressive with my approach to SPAC warrants but you must understand, warrants can go to $0. 1. A warrant is the option to buy a share at a certain price. If I buy a $1 warrant today to buy a SPAC, I am paying for the option to buy the stock once it meets certain conditions. Common terms include a post-merger stock holding a share price of $18 for 20 days in a 30 day trading period. Sometimes they can add a 'set date' to start exercising warrants on top of the first condition. The strike price is a set price of which you are able to convert the warrant into an actual share. Usually, the strike price is $11.50. Warrant Price + Strike Price = Share Value Example: I buy 100 warrants at $1 to purchase a SPAC. The SPAC announces a deal and the common shares go up to $20/share for 20 days. I can now convert my shares to the common stock and pay: $11.50 strike + $1/warrant = $12.50 for a common share. Basically, I just paid $12.50 for a $20/share. 2. Units can be deceiving because it consists of 1 common share + a fraction of a warrant. Some unit-warrants are ½ shares, some are ¼ shares. So basically if you buy 4 units with the ¼ warrants, when you separate them it'll convert 4 commons + 1 full warrant. Always look before buying and then multiply to figure out the 1:1 ratio. Example: A $.50 warrant that represent ¼ share is really a $2/warrant for 1 share. $.50 * 4 = $2. 3. Another thing to mention is that you can trade a warrant like a stock. Warrants usually start in the pennies per share because they are significantly riskier than SPAC common shares. Unlike common shares that have a bottom of $10/share + interest, warrants can go to $0 and rip out the carpet from underneath you. Many experienced traders prefer warrants because it allows them to front less money while giving them an option to get in the game at a later date. You also have the ability to sell the warrant like a stock. Ex: If you have 1000 warrants at $1/share, thats $1k. If the warrants double to $2/share, you can sell your warrants for a 100% gain or you can hold them with the hopes of exercising at a later date. Another example: I buy warrants at $.20 each and the SPAC announces a Letter of Intent (LOI) with a company, the warrant will likely increase to above $.60 each. If the SPAC puts out more PR and the company has major upside, the warrants can hit $3+ super quickly. This entire time, I can sell my warrants the same way I sell common stocks. The only difference is with a warrant, you’re risking it all bc of the LOI falls through, the $3/warrant will drop back to pennies. You risk is all about when you buy the warrant. 4. Unit/Warrant tip: Pay attention to IPO dates for new SPACs. Look for big names in management and find a SPAC that you believe will target a valuable company and take care of your investment. Buy units or warrants immediately before they get any hype from PR and sit on them. Warrants can go to $0 but your odds at major gains go way up if you get in early and at a low price. Then sit back and have some patience. It's in the hands of the titans you invested with.





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