SPAC101 - Start To Finish In 5 Minutes
Updated: Feb 5
Very early on, it became apparent that SPAC info required deep digging and the FREE informational resources were weak. Now that SPACs are in the limelight, I get several texts a day asking to explain how SPACs work and those texts are usually followed with "can you just invest for me?!"... to that I say, "DO IT YOURSELF YOU BUM."
First & foremost
If you're reading this, you probably have 100+ trades in 2020 & have a major TAX headache coming your way. Click the article below to save yourself from the migraines:
Intro: The Obvious Questions
Let me ask it for you... WHAT'S A SPAC?
SPAC stands for Special Purpose Acquisition Company. You'll often hear them described as 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.
In the most simple terms, a SPAC is a fancy way for saying a rich guy's company that aims to buy another company. If you invest in a SPAC, you trust the rich guy with your $ to buy/merge with a super sweet private company... Basically another form of Venture Capital.
Step 1: Assembling The Team
When you've got mega-bucks, you're always looking to buy stuff. A SPAC is the best way for a bunch of rich people to pool their money and buy a private company. Every SPAC has several board members, some that actually do the heavy lifting and some that are just for show. The positions consist of:
CEO/President - Usually the person with the most $ and the one that assembles the team
COO - Summarizes deal info from the CFO and gives it to the CEO
CFO - The one that does the heavy lifting. The CFO is responsible for valuing companies, operating financials, and all the headaches that come with running a publicly traded fund.
Chairperson/Boardmember/Director - Other rich guys that are friends with CEO, invested in the SPAC, and/or have fancy resumès that add the 'WOW factor' to a SPAC's team.
Step 2: Going Public
Now that the team has assembled, they form an LLC and deposit hundreds of millions into the business. The LLC essentially serves as holding company for the rich guys as their $ is secured in an Interest Bearing Trust Account.
They then take the LLC with the $ in trust and IPO it onto the public stock market. The same way Airbnb or any company has an Initial Public Offering (IPO), the LLC does the same thing and once on the market, it is officially a SPAC that trades exactly like a stock.
The $ invested by the rich guys that is sitting in the trust account serves as security for the publicly traded shares. For example: a $500m SPAC has $500m of cash in trust. This cash in trust secures 50m/shares at $10/share (50m/shares * $10/share = $500m SPAC). This means the Net Asset Value (NAV) is $10/share.
For this exact reason, a SPAC's common shares have a floor of approximately $10/share aka Redemption Price. The more complex explanation is the 50m shares that IPO are technically "Units." A unit is 1 common share + a fraction of a warrant. Read more about Units, Warrants, & Commons here.
Step 3: The Search
Let the fun begin! Now that all the headaches of assembling a team, forming an entity, and raising capital are DONE... it's time for the real show we came here for. According to Spencer Rascoff, Zillow founder - Palantir Boardmember - CEO of Supernova SPAC, he speaks with 1-2 unicorns..... EVERY DAY. He's essentially dangling an 'IPO in a Box' in front of private companies. (Side note, he liked my Tweet - follow me @SPACdaddy)
Everyone wants to know why SPACs are so hot? Because there are thousands of unicorns and hundreds of SPACs all ready to make deals happen. As of January 18th 2021, there are 320+ SPACs on the market & 100+ SPACs in the IPO pipeline. in the first 2 weeks of 2021, 53 SPACs IPO'd! We're at a point where the investors that have big $ are launching their 2nd and 3rd SPACs before they even have a deal with their first one. This is because they meet with so many companies and are setting up their pipeline for future SPAC mergers.
Step 4: The Rumor Mill
As these conversations progress, SPACs usually sift out the junk and begin to develop further negotiations with a select few private companies. This is when 'leaked' news hits the Rumor Mill. I emphasized the word 'leaked' because SPACs intentionally leak that talks have happened to test the market. If the market responds well & the SPACs price increases, over 75% of the time the rumors prove to be true (according to SPACtrack's analysis).
Depending on the quality of the source & the hype of the potential company, the rumor could positively impact the stock anywhere from 10-100%. It is especially risky to invest in a SPAC that is flying high based off a rumor because if that rumor fails, the SPAC should drop close to its Net Asset Value (NAV) of $10/share.
Step 5: LOI & DA
If the rumors prove to be true, the SPAC will announce it has an LOI with the company. An LOI is a non-binding agreement that essentially means, "we're in talks." While it is non-binding and eventually expires, it makes it illegal for the company to speak with any other SPACs. This exclusivity is key to negotiating a Definitive Agreement (DA).
The DA is a binding agreement that means the company is going to vote to approve the merger within 2-3 months. A company can't back out of a DA and this is the most secure of the agreements. When a hyped company signs a DA with a SPAC, the price impact is usually more exaggerated than the rumors because a DA means, "this deal is happening." Now it's up to the shareholders and SPAC management to get it to the endzone. Read more about the timeline of a SPAC.
Step 6: The Vote
Once the DA is signed, the SPAC usually takes 3 months to organize the merger vote. Every shareholder (us) get's 2 votes for every SPAC merger.
Do you approve of the merger between SPAC & Company?
Do you wish to redeem your shares at the redemption price (NAV)?
It's important to note that these votes are mutually exclusive: you can vote YES on one and NO on the other. In theory, if the SPAC is trading at $15/share pre merger, you should vote:
Do you approve of the merger between SPAC & Company? YES
Do you wish to redeem your shares at the redemption price (NAV)? NO, why would you redeem at $10/share + interest when you could just sell it for $15?
Step 7: Ticker Change Finally, the moment we've all be waiting for..... drumroll please!
Assuming the merger vote approves (99% of the time it does), the SPAC will dissolve and become the private company. This is the final part of the reverse merger acquisition... the Ticker Change. Now that the SPAC has served it's purpose and has agreed to merge with the private company, the ticker it has been trading as dissolves and becomes the new ticker of the company. For example, DEAC (Diamond Eagle Acq) -> DKNG (Draftkings). If you want to understand further why private companies would choose a SPAC IPO vs a traditional IPO, read more here.
That's all folks. Now you know the SPAC process start to finish. If you need help understanding the fundamentals & want info on the behind the scenes GameStop fiasco, read this:
P.S. This blog is picking up steam, help me out by sending it to your coworkers & follow me on Twitter @SPACdaddy. You know this is much more interesting than whatever they're doing...