1. What is a SPAC? And should you invest in SPACs?
The typical SPAC is a Delaware corporation that completes an IPO for as little as $40 million to as much as $800 million, although there isn’t a set minimum or maximum. Over the past two years, the average SPAC initial public offering has raised $234 million. In the IPO, a SPAC offers units to investors for $10.00 per unit. Each unit consists of a common share and a fraction of a warrant. Units contain anywhere from 0.25 warrants per unit to as much as a full warrant per unit. The warrant terms are such that they offer the investor the option to buy more shares at $11.50 per share in the future (as long as five years), giving a SPAC unit investor further upside on the performance of the company. Capital raised in the IPO is placed in a trust account, which is tightly governed. This capital may only be invested in the safest securities – typically U.S. treasuries of tenors less than 185 days. These funds cannot be used to finance the operations of the blank-check company as it searches for an acquisition target. The capital raised in the IPO remains in the trust account accruing interest and is only used to acquire a company or to distribute to redeeming shareholders. To provide the necessary working capital, the SPAC sponsor subscribes to private placement warrants, which will allow the sponsor to buy shares at $11.50 after it completes a business combination. This investment in private placement warrants represents capital at risk for the sponsor. If they do not get a deal done within the allotted time frame, the millions of dollars spent on the private placement warrants are lost. The private placement warrant financing provides working capital to the SPAC, so the IPO proceeds in trust remain untouched until the deal vote, business combination or company liquidation. Where is the upside for the sponsor or promoter of the SPAC? In exchange for setting up the blank-check company, funding the working capital through a subscription of private placement warrants and searching for a business combination, the sponsor is given founder shares for nominal consideration. These founder shares convert to 20% of the pro-forma SPAC once a business combination is complete. If a SPAC fails to complete a business combination within the specified time frame, these founder shares become worthless as are the private placement warrants. There is immense financial pressure for a sponsor to get a deal done. More information can be found here and below:
2. Should you invest in SPACs?
SPACs have historically shown an ability to provide value in the context of a diversified portfolio. Here are a few resources to learn more about one form of SPAC investing, SPAC arbitrage:
3. How do SPAC warrants work?
SPAC warrants entitle the investor to purchase one common share at a predetermined strike price for a given period of time. The industry norm is an $11.50 strike price and 5 year expiration after the initial business combination. Although there is an industry norm, it is important to read the prospectus carefully to understand what the terms are for the initial offering, as these may vary. Also note that only whole warrants are exercisable, this is relevant because most SPAC units contain a fractional warrant.
4. How to trade SPAC warrants?
SPAC warrants are listed on public stock exchanges, such as the New York Stock Exchange (NYSE). There is typically a 45-90 day period after the SPAC IPO before the warrants can be freely traded, but after that time warrants can be traded through an investors broker in the same way one would a normal stock or option.
5. What happens to a SPAC stock after a merger?
The SPAC common shares and warrants will convert to the pro-forma entity after the merger is complete. This will typically include both a ticker and a name-change.
6. How to trade SPACs?
SPAC units are listed on public stock exchanges, such as the New York Stock Exchange (NYSE). Investors are then able to trade SPAC common shares, units, and warrants through their brokerage account.
7. How to split SPAC units?
After the SPAC common shares and warrants have started trading separately, an investor has the option to instruct their broker to split their units into the common share and warrant components. In some instances, the SPAC will choose to automatically split the units into the common share and warrant components and concurrently delist the units. No action would be required by the investor in this situation.
8. How do SPAC units work?
An initial offering for a SPAC is typically in the form of units which contain 1 common share and a fraction of a warrant. For a more fullsome description of what a SPAC is, please see #1.
9. How to invest in a SPAC ETF in Canada?
There is currently only one Canadian exchange-listed ETF, the Accelerate Arbitrage Fund (TSX: ARB).
10. How long do SPAC warrants last?
Warrant expiration is typically 5 years after completion of the initial business combination or earlier if the SPAC is liquidated. In many instances there are also common share price levels that may trigger the warrants being called as well.
11. What happens when SPAC units split?
SPAC units are typically eligible to split, as defined in the prospectus, between 45-90 days after the IPO. At that time, an investor can instruct their broker to split their units into the common share and warrant components, where they will typically receive 1 common share and a fraction of a warrant per unit. The fraction of a warrant per unit will be defined in the prospectus. In some instances, the SPAC will choose to automatically split the units into the common share and warrant components and concurrently delist the units.
12. What happens to SPAC units after a merger?
SPAC units are automatically delisted at the closing of the initial business combination, where they are split into their common share and warrant components.
13. What are the risks of SPAC investing?
The risks of SPAC investing can vary and will depend on the strategy that is being implemented. For example, a SPAC arbitrage strategy differs from buying warrants or speculating on the post-merger entity after the initial business combination. It is important for investors to understand the risks inherent in their chosen strategy and select a strategy that best works for them. The risks section of a SPAC prospectus provides a comprehensive list of potential risks.
14. What if the SPAC doesn’t find a merger target?
If a SPAC doesn’t complete a merger with a target in the time period defined in the prospectus, the SPAC trust will be liquidated. The period of time the SPAC will have to complete the merger will vary, but is typically 24 months from the IPO date. At the time of liquidation, investors will receive the IPO proceeds that have been placed in trust, plus interest and less any dissolution expenses that are paid out of the interest income.