What is a SPAC Stock?

A SPAC stock is simply stock in a Special Purpose Acquisition Company, which is an entity formed for the sole purpose of eventually acquiring an existing company, but maintains no business operations of any other kind. The funds raised in the SPAC IPO are used to purchase a private company and bring it to the public market to trade on a stock exchange.

SPAC Overview

When compared to a traditional IPO, the SPAC IPO process is generally quicker and simpler.

SPACs are created by a management team that usually has expertise and experience within a specific industry. The team and its sponsors form the SPAC with the sole purpose of pursuing deals, usually in that industry or sector. While the SPAC team may have a private company or several in mind for potential targets, negotiations with the potential targets are not finalized until after the IPO. The disclosures required by the Securities and Exchange Commission (SEC) for a SPAC revolve around the management team, its experience, and the SPACs areas of focus, which is a lot less disclosure than is required in a traditional operating company IPO. The SPAC goes public with the help and advice of its bankers and lists its securities on a stock exchange.

Once the SPAC is officially listed on an exchange and begins trading, the funds raised in the IPO are placed in an interest-earning escrow account and may only be used to complete the acquisition. The SPAC usually has a two-year window to complete a purchase with the funds. If this deadline is not met, the SPAC is liquidated, and the money is returned to investors.

SPACs are becoming an increasingly popular alternative to the traditional IPO process. Read more about how SPACs differ from traditional IPOs.

Investing in a SPAC Stock

SPAC stocks are typically priced at $10 per share. Investors purchase shares with a partial or full warrant and then wait for the SPAC to make an acquisition.

A SPAC warrant grants a buyer the right to obtain stock at a certain price. For instance, let’s say you have a warrant for $10 at a 1:1 ratio. One warrant is equivalent to one share. If the stock price climbs to $19 , you have the right to buy the stock at $10, giving you an instant net profit of $9. The SPAC’s prospectus lays out the specific rights for the SPAC investor beforehand.

Following the completion of the acquisition by the SPAC, shares of the SPAC are converted to the shares of the new combined entity. Investors have the right to redeem their shares ahead of the merger and have the right to vote for or against the merger. These two rights are separate so that the investor has the right to both vote for the merger and redeem the shares if they so wish. The investor can also hold on to their shares if they believe that the price of the shares will appreciate post-merger.

Advantages of SPAC Stocks

  • Pricing: The majority of SPAC stocks have an initial IPO listing of $10 per share, an amount that’s favorable for most retail investors. It’s common for the price point to remain close to the initial price for a few days following the IPO’s listing.
  • Low-Risk: Although investors may have to wait for up to two years to learn the identity of the acquisition, they have the option of getting their money back if the acquisition is unsatisfactory. If time runs out for the merger to occur, the money is automatically returned to investors.
  • Popular with Established Investors: SPACs are currently experiencing a massive rise in popularity among some of the country’s most well-known investors. 248 SPACs IPOd in 2020 and raised over $80 billion. This is a sizable increase when compared to 2019, which saw 59 SPACs raise around $14 billion. SPAC popularity is continuing into 2021 with 160 SPACs IPOing and raising around $50 billion through February 2021. Notable SPAC investors include Richard Branson, Bill Ackerman, Michael Jordan, and investment banks such as Morgan Stanley and Goldman Sachs.

Possible Drawbacks of a SPAC Stock

The main disadvantages with SPAC stocks center around the uncertainty of the investment as a whole. Investors are in the dark as to what the acquisition will be until it is announced. They are also unaware of how long the process will take within the two-year time limit. The only information the average investor has prior to making a financial commitment is the record and reputation of the group behind the SPAC, and possibly their preferred industry. Still, this cannot be used to accurately predict what the acquisition target will be in the end.

How Woodruff Sawyer Can Help

Woodruff Sawyer is the market leader for placing Directors and Officers (D&O) insurance for IPO companies. Woodruff Sawyer is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a critical element of the SPAC M&A process.

Read more about SPACS from our team of experts, including Why More SPACs Could Lead to More Litigation (and How to Prepare) and An Avalanche of SPAC M&A Deals Predicted for Q1 of 2021: Lawsuits Certain to Follow.