SPACs 101 | What is a SPAC and should you invest?

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SPACs 101

SPACs – they’re all the rage in the financial world right now. Although they have been around since the 1990s, they have recently gained in demand as a way of avoiding the tedious traditional IPO route.

Go back to 2009 and you will just find one SPAC IPO. However, Nasdaq reported that in 2020 (as of December 28, 2020) there were 237 of them, for gross proceeds of $ 79.87 billion. That was almost $ 13 billion more than traditional IPOs!

So, yes, SPACs are certainly on the up on Wall Street. But wait – what exactly is a SPAC again? Read on to learn what you need to know about SPACs, how to invest in them, and whether or not you should.

What is a SPAC?

SPAC stands for “Special Purchase Acquisition Company”. They are also often referred to as “blank check companies”. Basically, it bundles investor money and holds it while it looks for investment opportunities. Investors may not know beforehand what the opportunity will be. Hence the term “blank check”.

Think of a SPAC as a shell company. Nothing is done other than borrowing money from investors. At some point it goes public through an IPO. Then it has a certain amount of time (usually less than two years) to find a company to target for an acquisition and merger. The hope for investors is that the acquired company will generate strong returns.

The SPAC and the acquired company together form a public company. Investors who stay with the company will see their stocks rise and fall just as the company’s publicly traded stocks do.

A SPAC cannot sit on investor money indefinitely. The maximum time limit to find an opportunity is two years, but the company’s self-imposed time limit is often shorter. If an opportunity is not found before the deadline, investor monies will be returned in proportion to the shares they hold.

In addition, investors can vote to approve the proposed opportunity / acquisition. If an investor does not agree with the opportunity, they can take their money and exit the SPAC.

Example SPACs

The following is a list of previous SPACs that have already been acquired and matched with their goals. You can enter any ticker to get the current prices.

  • DKNG – Draftkings (merged with Diamond Eagle Acquisition Corp)
  • NKLA – Nikola (merged with VectoIQ Acquisition Corp)
  • SPCE – Virgin Galactic (merged with Social Capital Hedosophia Holdings)
  • LCID – Lucid Motors (merged with Churchill Capital Corp IV)
  • MILE – Metromile (merged with INSU Acquisition Corp. II)

There lots Other SPACs that have either not yet announced or not yet finalized their mergers. Here are just a few examples:

  • IPEO – Social Capital Hedosophia Holdings (announced upcoming merger with SoFi)
  • GIX – GigCapital2 Inc. (announced upcoming mergers with UpHealth and Cloudbreak)
  • APXT – Apex Technology Acquisition Corp (announced upcoming merger with AvePoint)
  • PSTH – Pershing Square Tontine Holdings (no mergers announced yet)
  • TWCT – TWC Tech Holdings II Corp (no mergers announced yet)

How can I invest in SPACs?

SPACs typically value their shares at $ 10 each (note, however, that the price may fluctuate once the SPAC is traded). Each unit consists of one share plus one warrant or a partial warrant. Today you can find SPACs trading between $ 9.50 and $ 11.50. This is purely speculative based on what investors believe is possible after the acquisition.

It might come as a surprise to many investors that you can buy SPAC stock on public exchanges like any other stock. Just log into your brokerage account, search for the ticker and buy the number of stocks you want.

Be aware that going down the SPAC pathway will lose you the control that comes with a traditional IPO. So when considering investing in one, the management team is one of the most important components to consider. Is the team well known and have their previous ventures done well?

Read the IPO prospectus and related reports filed with the SEC. This means that you will have to do a lot of research yourself to make sure everything is legitimate.

Should you invest in them?

So can you expect a dramatically higher return on investment for all of that extra work? It is certainly possible, but the averages say no.

A recent report from Goldman Sachs found that SPACs have had an annual return of 9.3% since 2010. That is 4.3% less than the performance of the S&P 500 over the same period.

Those numbers are even more worrying when you consider that you’d have to invest everyone Investment opportunity to enjoy the average Return. This would be very difficult with SPACs, while it would be easy with the S&P 500 through an index fund.

It should be noted, however, that SPAC ETFs have emerged that can offer greater diversification. Examples are Defiance Next Gen SPAC Derived ETF (SPAK), SPAC Originated ETF (SPKZ) as well as SPAC and New Issue ETF (SPCX).

Final thoughts

SPACs can be an exciting opportunity for investors, but they can also be risky.

You need to do your research and conclude whether or not the investment is good business. If you’re unable to do the job required to invest in SPAC, stick with traditional stocks, ETFs, and mutual funds.

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