A Special Purpose Acquisition Csompany is a shell company used lately in many IPO. Many companies choose to go public via a SPAC to save cost and go through a faster process.
Each SPAC is created with an initial capital and an initial common stock offering with a $10 face value each.
The SPAC has a lifetime of 3 years. If a merger didn’t occur within 3 years, the SPAC is closed and the investors receive the initial capital.
That means that if you hold common stock, you’ll get back $10 for each.
As we know, the purpose of a SPAC is to merge with another, more valuable company, and change its ticker. The assumption is that after the merger, the company will rise is value.
Warrants let you speculate on that.
Buying a SPAC warrant, gives you option to buy a certain amount of stocks of the company after merger at a pre-defined strike price.
It’s important to note that not every warrant is the same. Each has different rules conditions which you need to read first.
More advanced investments mechanism, such as derivatives (options, warrants) have complicated rules. Mostly, people speculate on the future price of a stocks, and buy the option to buy or sell it in a future price.
This future price is also called a strike price, and define the price in which a derivative contract (an option to buy a stock for example) can be bought or sold.
When you buy a Call option, you buy the opportunity to buy the stocks at a certain price in the future. This price is the Call option strike price.
When you buy a Put option, you buy the opportunity to sell the stock at a certain price in the future (usually shorting it, believing that it will drop). This price is the Put option strike price.
Strike price refers also to warrants. You buy a warrant of a SPAC for example to gain the opportunity to buy more shares of the SPAC at a future strike price.
When a SPAC goes on an IPO, it is divided into units. Each unit contain 1 common stocks share, and a partial or a full warrant unit.
To know how the SPAC unit is structure, you need to go to SEC.gov and find the S-1 form of the company you’re about to invest in.
The SPAC units are available on the day that the SPAC go public (IPO date) and lets you buy in early on the SPAC.
Generally, SPAC common stocks and warrants are not available for trading in the first 52 days after the IPO.
This means that if you invest in the SPAC IPO, you buy SPAC units (which contains a stocks and warrant)
When a company wants to go public (list on the Stock exchange in the US), it’s needs to file many documents to the SEC (Securities & Exchange Commission)
The main file among these is the S-1 Form, which summarizes all the financial data regarding the company, and mostly describes the nature of the public listing.
Public listings may vary, the company chooses how many stocks to sell, how it is structured and so on.
Is SPACs, the S-1 is specifically important as it outlines the conditions for the SPAC, how warrants are treated and other financial information.
If you invest in SPAC warrants, you have to go over the S-1 as it may contain details which will affect your investment tremendously.
A SPAC warrant can possibly yield higher return rates, as it could give you the ability to buy the share at a lower future price. This makes it possible to double or triple your investment.
However, warrants are highly volatile and there’s a risk of losing the whole investment if the SPAC merger doesn’t go through.