SPACs aka special purpose acquisition companies are blank check companies that raise cash to merge with another established business with the overall goal of taking it public. Investors like the idea of SPACs because it allows them to invest in the early stages of a company just like wealth private investors make early stage investments in fast growing hypergrowth companies.
Many celebrity SPACs are launching this year and more investors than ever are interested in investing in these highly popular niche investments.
In this guide, I'll explain step by step how to invest in SPACs safely and answer all your questions about buying, selling, and trading SPAC stocks.
Table of Contents
- What are SPAC Stocks?
- How SPAC Stocks Work?
- What Happens to SPACs after the Merger is complete?
- Where to Find SPAC Stocks
- How to Research SPAC Stocks
- Where to Buy SPAC Stocks
- Frequently Asked Questions (FAQ)
What are SPAC Stocks?
As I mentioned earlier, SPAC stocks are cash trusts that seek to invest in another exciting high growth business. These stocks normally trade on the NYSE or NASDAQ but sometimes trade on the OTC markets. SPACs will often have a long undescriptive name that explains the SPAC while management searches for a business to merger with.
A good example of a SPAC stock is Stephen Curry's DUNE Acquisition Corp. Sometimes, companies will launch several SPACs and distinguish them by adding a roman numeral to the end.
For example, Shaquille O'neal is involved with two seperate SPACs:
- Forest Road Acquisition I
- Forest Road Acquisition II
These are two separate blank check companies that will seek out a competitive business to take public. It's important to make sure you are researching the correct SPAC because there can be as many as 5 SPACs or more all seperated by roman numeral.
How SPAC Stocks Work?
SPAC raise cash using an IPO offering with a listing price of $10. Each SPAC will list its shares on the NYSE, NASDAQ, or OTC to encourage investors to purchase the SPAC initially. Often, the SPAC will announce the upsized offering via a press release and list “units” on the stock exchange.
Each unit will consist of 1 common share of Class A stock and 1/3 or 1/2 of 1 whole redeemable warrant exercisable at a price of $11.50.
After the offering is closed, the SPAC units will separate and trade under 2 different ticker symbols. For example, Dune Acquisition started trading under “DUNEU” but will trade under “DUNE” and “DUNEW” to make things simpler. DUNE represents the class A common stock and DUNEW represents the warrants.
Once the IPO is complete. SPACs have less than 2 years to find a business to partner with or all of the proceeds from the offering will be returned to investors. As you can imagine, SPAC management and other important advisors interview dozens (sometimes hundreds) of companies to find the perfect business to merge with.
What Happens to SPACs after the Merger is complete?
Once the SPAC finds a good business to merge with, the SPAC will merge with the newly acquired company by including private equity shareholders, existing shareholders of the newly acquired business, and sponsored holders.
For example, Switchback Energy merged with Chargepoint in 2021 and the number of SBE shares went from 31 million to around 277 million under the new company: Chargepoint.
The SPAC will change its ticker symbol to match the merger and the target company's CEO will take over as the head of the new company.
After the merger is complete, the target company will receive cash from the deal to grow the business in the future. The newly formed company will trade on the NYSE, NASDAQ, or OTC markets like any other publicly traded company and report earnings on a quarterly basis to provide transparent updates on how the company is performing every 3 months.
Where to Find SPAC Stocks
Here's an updated list of SPAC IPOs that make it easily to find the most popular SPACs based on market cap. I also recommend reading online news outlets like Wall Street Journal to find more hot SPACs to watch.
How to Research SPAC Stocks
Before a SPAC goes publish, the SEC requires the blank check company to issue a prospectus detailing everything about the SPAC before it goes public. These documents provide a lot of key information about the deal, corporate management team, business merger target, etc. Go to the SEC's Edgar Company Filing Database and type in the name/ticker symbol of the SPAC and hit search to find the latest prospectus.
Most SPACs will publish a press release on Globalnewswire containing key information about the blank check company during the initial unit offering. That's where you will find out about notable celebrities and investors who are involved with the SPAC. Larger SPACs will have a website with more information about the IPO, management team, and history of the company.
You can also find investor presentations by visiting the SPAC and/or target company's Investor Relations section. Investor Presentations help provide a clear description of the company's background, goals, revenue targets, and overall transaction summary.
Where to Buy SPAC Stocks
Most well known SPACs trade on the NYSE or NASDAQ. You can purchase them through an online broker like Webull. If the SPAC is listed on the OTC markets then you'll need a full service broker like Fidelity or Etrade to purchase the shares.
Frequently Asked Questions (FAQ)
Are SPAC Stocks a Good Investment?
I believe SPACs are a good investment because they level the playing field for retail investors. SPACs provide the opportunity to invest in some of the world's greatest companies at a starting price of just $10. I find it much cheaper to invest in SPACs than traditional IPOs that have yeards of forward revenue growth priced in already.
Now, there are some downside risks to SPACs including the 20% sponsor fee and the 6 month share lockup period expiration. Because of these downside risks, some investors shy away from SPAC investing. However, I believe time in the market is more important than timing the market so SPACs provide a simple way for investors to get in as cheap as possible without needing to become an early stage seed investor.
How Much is a SPAC stock?
The typical IPO price for a SPAC stock is $10. The exercise price for SPAC warrants is generally 15% higher than the IPO price. Most SPAC warrants are exercisable at $11.50 per share.
Can SPACs go below $10
Generally, no. the NAV (net asset value) of a SPAC is $10 x the number of units outstanding. This means each share has an intrinsic value of $10 so you won't see many pre-merger SPACs trading below $10. However, sometimes a post-merger SPAC will trade under $10 due to a breakdown in the newly acquired business, bad industry news, or an overall bearish stock market.