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What Is A SPAC? - Everything SPAC And How It Works (Video)

Feb. 03, 2021 4:00 PM ET56 Comments
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  • A Special Acquisition Company isn't new, but popular sponsors in the finance industry are using them more frequently to bring private companies to the public markets.
  • In this video, we cover everything you need to know before investing in a SPAC.
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The following text is a transcript for our readers who would like to follow along:

What is a SPAC? A SPAC, or Special Purpose Acquisition Corporation is a company that raises money through an IPO for the sole business purpose of acquiring an existing private company at some point in the future. Therefore, bringing that private company to the public markets. This is why people also refer to a SPAC as a "blank check company."

But, how does it work? What does the capital structure look like, and why is it a favorable method for private companies to go public? Well, let's start with how it's created.

A SPAC is formed when either an individual or company, referred to as the sponsor, submits a registration document with the Security Exchange Commission, the SEC. This document is called the S-1, and on this document the sponsor marks this new Corporation as a SPAC. Well, when a SPAC raises money on its IPO day, those funds are placed in an interest bearing trust account. This money cannot be dispersed except to complete an acquisition of the target company, or to return the funds to its shareholders if no acquisition is completed by the closing date. Which is typically 18 to 24 months after the IPO date. Although if it comes down to it, a SPAC can request an extension of the time frame, and then the shareholders could approve or deny that request.

If a SPAC fails to complete a business acquisition by the closing date, and the shareholders don't grant an extension, then the public shares are redeemed for a pro rata portion of the cash in the trust account and returned to the shareholders. Now, if a SPAC does complete a successful acquisition, then the company is usually listed on one of the major stock exchanges. Typically the NASDAQ, or the New York Stock Exchange.

One stipulation of a SPAC acquisition though is that the fair market value, which is the price that the company would sell for in the open market of the target company, must be 80% or more of the SPAC's trust funds. So, if this SPAC had $800 million in its trust account, then the target company would have to have a fair market value of at least $640 million. So, what does the capital structure of a SPAC actually look like anyways? Well,

When investors buy into the IPO of a SPAC, they're usually buying what's called a unit, and either a fraction or the entirety of a warrant. Now, a Unit just stands for one share of common stock plus a warrant, which gives the investor the right to buy a share of stock later at a predetermined price at a specific time. Warrants can sometimes only be worth a half, a third, or two-thirds of a share of stock, depending on what was established when the SPAC was created. You might be asking how is that any different than an option?

Well, a warrant when exercised actually provides additional capital for the company when the shares sold.

Options don't do this since they're just contracts only traded between investors. A SPAC warrant can also be different in the sense that sometimes the structure of a warrant doesn't allow the investor to exercise until specific events are triggered. That can be time, revenue goals, the share price of the existing float, etc. And, an issue that most investors are not aware of, is that when warrants are exercised, or force exercised by the company in some cases, it increases the shares outstanding on the market. Therefore diluting the existing shares being traded.

But, what about the creators of the SPAC? What's in it for them? Well, they typically hold what's called Founder Shares which entitle them to 20% of the common shares in the new company brought to the market. There's usually a lock up period of about one year on these shares, but in some special scenarios that time frame can be shorter. A lock up period protects the interests of the market, preventing these SPAC's from being a get rich quick scheme. But, getting 20% of the common shares is the trade off for the sponsor not being able to receive any salary or commission from all the work they do until the acquisition is completed.

So, why do private companies like going public via a SPAC anyways? Well, there's usually a few advantages such as: gaining the expertise of a sponsor who has brought other companies to the public markets, or skipping the long process and large fees of a traditional IPO. Or, how about this one? SPAC's typically acquire companies at a premium, adding value to the private company for its earliest investors and management team.

So the bottom line, SPAC's are just a company created by people or companies with great reputations. Capital is raised and a private company is brought to the public market through an acquisition. And if the SPAC works correctly, then everyone wins.

If you're interested in SPAC investing opportunities Seeking Alpha has a great free IPO daily newsletter that includes SPAC coverage. And, if you're interested in receiving this free newsletter, click the link below this video right now.

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Comments (56)


What is the cost basis for the shares and the warrants once the unit is split? I purchased units in RSVA for $13.61 (RSVAU); it is currently trading at $19.22. I now have the option to divide each unit into 1 share and 1/2 warrant. The shares trade as RSVA, recently trading at $16.13 and the warrants as RSVAW, recently trading at $6.12.

If I split my units and sell my warrants what is the cost basis of a warrant, and is the gain treated as ordinary income or a capital gain for tax purposes? Additionally what is the cost basis for a share? I read the prospectus and it is pretty obscure on this matter.
Seems to me from what I remember being series 7 registered a long time ago we arre talking " Blind Pools" !
A clear example of how a SPAC sponsor and 'friends' can leave a bunch of bags into retail investors: GHIV, now UWMC. Mr Gores did a good job for himself, apparently. Stock 100% manipulated
Thank you for this video.
kitkimes profile picture
I bought a 100 units of $STPCU at about $11.50 just to see how the process works. I'll let you know in a couple of years how it went. LOL
johnradams profile picture
Warrants vs options -- what's the difference? Warrants can arguably be best described as "long-term calls".

Most options trading is, as noted by the author, involves parties buying and selling options (puts and calls) on the option exchanges. And the author correctly notes that such transactions do not involve the company.

However, companies can and do issue options (call options) to employees. Happens all the time. Such options make up a lot of the stock-based compensation (and subsequent dilution) of companies (typically tech companies). And when the employee exercises the options, the company does get the money from the exercise (the strike price). For a start-up, such options might be issued at a penny, so the money received by the company upon exercise is de minimus. Later option grants, when the stock is worth something, typically involve strike prices that result in meaningful cash exercises.

Warrants are just another word for call options, and using this word makes it more clear. Warrants are typically for longer periods, often a year or two or three or more. Warrants are issued for a variety of reasons, such as to sweeten an investment. For example, if you loan a company some money, you might get interest, plus return of your principal, plus some warrants to give you some extra upside for taking on the risk.

Like any option, if the warrant is not ever "in the money" before it expires, it expires worthless.
I want Alex Rodriguez’s M&A expertise, business acumen and familiarity with private and public securities markets. All that can be yours, in the A-Rod SPAC.

Get yours today!

@Schnipper Steph Curry, Ciara, Serena Williams...more SPACs to buy and sleep soundly at night knowing these business titans are there to make you money. Caveat Emptor!

@fuzz_head I was being facetious. Steph Curry and Serena are talented athletes. But "business titans"? No.
anealbening profile picture
Anyone here got $SBE - Switchback Energy Acquisition?
@Chris DeMuth Jr.Is it necessary to call Vanguard to specifically request my GMIIU be split into GMII and GMII-WT? Thank you.
plenty of good comments / do the homework study LGVW both the people who developed the product and the organization doing the SPAC. The same way every doctor carries a stethoscope in the future doctors all over the world will have this in their white coat pocket. store.butterflynetwork.com/...

I Like those spacs
Chaco profile picture
@Chris DeMuth Jr. I like a couple of those. These are some of my favorites right now - CLII, GIK, STIC, BTWN & BTAQ.

Any opinion of those? I've had good luck so far with RMO & XL, but I think both of those are still pretty ground floor.
Chris DeMuth Jr. profile picture
@Chaco yes, I have opinions on each of those.

- C

Holy moly, this is not going to end well for the retail investors, is it?
@Seriouspatt most retail investors have already earned 300-500% on spac's and are using house money on new spac's. I bought Draftkings, chargepoint, desktop metal, luminar, all as spac's. Now rolling those profits into the new spac's like AMCI, BFT, IPOE, CCIV.
Skyfall7 profile picture
@grewalg87 thanks. Whose spac did you get draft king & luminar through out of interest? And are their any current spacs with successful history of previous spacs you’d recommend ?
An excellent introductory video. Thank you.
Thank you!! I was wondering yesterday what it all meant
vooch profile picture
gimme money

I want to buy a company,

but I can't tell you which company
Chris DeMuth Jr. profile picture
@vooch will you give me a free call and a free put with a strike price at or above my cost basis? Do you have decades of successful M&A experience at a top hedge fund, PE, VC, or in industry? If so, then I would like 10% of your IPO offering, 10% of your PIPE and 10% of your founder shares.
vooch profile picture
@Chris DeMuth Jr.

If someone is that successful at M&A, then he surely doesn't need to tap retail for capital. I've bought, ran, and sold 4 companies and after the first success, raising money was never an problem.

SPAC just screams 'sucker'

Yup, Jeremy Grantham may have his blind spots

but he seems correct on SPACS here;

Grantham Warns of Biden Stimulus Further Inflating Epic Bubble


Erik Schatzker

January 22, 2021, 8:00 AM EST

• GMO co-founder predicts collapse will rival 1929, 2000 crashes

• With few places to hide, he favors value stocks, green bets


Where he thinks SPACS are a terrible idea

but clearly making many financial intermediaries rich from placement fees

and IPO pops.
Good video but what is the process to purchase units in a SPAC? If you have an Ameritrade, E-Trade, or Schwab account, what are the steps to making an investment during the investment period before going public?
Chris DeMuth Jr. profile picture
@GOAT STOCK it takes a lot of scale and relationships with the underwriters. 9-figure annual commissions great. 8- good. 7- barely okay. 6- or less you will be chasing scraps and have some perversity in which ones you get.
@Chris DeMuth Jr. Chris, but IF I wanted to purchase a SPAC, how is it purchased? No articles that I have read even mentions how to do this. I understand that SPACs are a risk. I just was curious of how a purchase is made.
Chris DeMuth Jr. profile picture
@GOAT STOCK you ask the bankers. But what I was trying to say has nothing to do with the risk. It has to do with the commissions to that bank proportional to your allocation. If you spend $100,000,000 on $GS trading commissions each year, your allocation will be great, $10,000,000, it will be good. $1,000,000 so so. Beneath that you will get either tiny amounts or allocated bad ones.
blucrab profile picture
Question, let's say I buy 100shs in a SPAC. If & when the merger happens, & trades under the new symbol, do I still have the 100shs ?
team Gabe profile picture
great presentation
Louis Stevens profile picture
We recently built (coded) a SPAClytics tool, where you can compare units, warrants, and shares.

All you do is enter the price of each security, and it outputs what is the best value based on the pricing of the units, warrants, and shares at any given time.


Try it out!

Please note that it is exclusive for Beating The Market members :) (seekingalpha.com/...)
Pacifica Yield profile picture
SoFi is one to watch.

@Winds Research is this the one tied to hedosophia....

(I knew a girl named Sophia who was popular at the hedo resorts. I wonder if there’s any relation)if so buy buy buy 😝 it’s an up and comer
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