Since everyone has been loading the Super Duty with SPAC stocks and warrants and units of late, it stands to reason that everyone fully understands what SPACs and warrants and units are. Right? Indeed, most likely you are a SPAC expert. But because we want you to share this newsletter on Twitter, Facebook, MySpace, Compuserve Bulletin Boards, Multi User Dungeons, wherever - we’ll lay out some basics so that in sharing this post, you can feel the warm glow of helping to educate your fellow travelers.
SPAC, as everyone knows, is an acronym for Special Purpose Acquisition Company. The clue is in the title. A SPAC is a company formed for the sole purpose of going hunting for big game. It is in effect a big brown bag stuffed with money, and promises of more money, to big up the SPAC sponsor - the folks running the SPAC - in the eyes of its quarry. If you choose to buy securities in a SPAC before you know what the likely acquisition is, you’re in essence just backing the judgment of the sponsor. Nothing wrong with that. If you buy securities in ETFs or mutual funds or any other kind of large bag of money, you’re doing the same thing - backing the fund manager
. Even if you buy the big dogs, SPY or QQQ, you are backing the manager to accurately track the indices - the S&P500 and Nasdaq respectively - that they say they are going to track. The identity of the fund manager, and whether they’re on a hot streak or not, matters. Just ask everyone’s favorite Millionaire Maker, Stock Mommy
So, you have a SPAC in mind, a bunch of money-people (with industry-people as sidekicks, if you’re lucky) who spend their days dialing for dollars, as in, finding some jackpot winners to whom to give those dollars. Sorry, not give those dollars, we meant, of course, invest those dollars by way of, what is it again, oh yes, partnering with Exciting Company X. All good.
For the last couple years SPAC securities have followed a broad pattern, but the devil, as always, is in the detail. Typically, public market participants who don’t have gabillions under management can buy three different types of security in the SPAC. The stock, which is common equity; warrants, which are the right to buy the stock at price X before date Y; and the unit, which is usually one share and some fraction of a warrant. In time, the units are split into their constituent parts and trade accordingly.
Once the SPAC is formed and trading on your friendly neighborhood exchange, the SPAC sponsor usually has a fixed period of time within which to conclude an acquisition or investment in a hitherto privately owned, non-traded business. Once they find that target and agree it with the target’s board of directors and shareholders, the SPAC files a ‘merger agreement’ with the SEC detailing the terms thereof. So far so small print. They also tend to file a very bright shiny object called an investor presentation. This tends to have large sized fonts, numbers and charts which go from very small to very big, always from left to right. And usually some stuff about changing the world one grommet at a time, or whatever. If you’re thinking of investing in that SPAC, you should definitely read the investor presentation. You need to. But then read the doubleplusboring small print in the merger agreement or, if you can’t be bothered to, consider paying a securities lawyer to do so and explain it to you. Because in the small print be the stuff that the SEC is getting all hot under the collar about right now
. We’ll come to that in a moment.
If you now own securities in a SPAC which has announced its planned merger (it’s called a merger because the two separate companies, the SPAC and its target, combine as one and then trade under a single ticker, usually based on the name of the target), it can be months before the merger completes, and it may not complete at all. Then, if it does complete, never forget that you bought securities in a thing that was going to invest in or acquire another thing. So even if your handle is @BarkingDog and you be the next underground hero of retail investing, putting your gabillions to work for the people and in so doing have selflessly come to own 10% of the SPAC … you don’t own 10% of the combined new company. You own less. Usually, but not always, a lot less.
SPACs are speculative creations. Nothing wrong with that. You just have to know it when you consider buying into one of them. You are speculating on (a) the skill and luck of the SPAC sponsor, (b) their ability to raise proper money from institutional money which will fund the actual investment or acquisition they make, © their successful selection, valuation, due diligence and completion of the acquisition or investment and (d) the subsequent performance of the underlying company both IRL and in the Land Of Make Believe aka the stock market, two dimensions of existence which as we all know are entirely orthogonal to one another. In short: this isn’t Ma Bell you are buying here.