What is a SPAC?

A SPAC is a Special Purpose Acquisition Company. The idea of a SPAC started way back in 2003 and since then over 525 SPACs have gone public. This is a form of an IPO. If you don’t know what an IPO is check Bodhi’s post here. Recently SPACs have been blowing up the investment world. Some recent SPACs you may be unaware of are companies like Nikola and Draft Kings. These both went public through a SPAC.

So now into the details of what a SPAC is. A SPAC is a publicly listed vehicle. They are non-operating platforms formed by prominent sponsors who look for operating companies to merge with and go public. Usually an 18-24 month time frame. Investors, like you and me, can purchase shares of the SPAC at $10.00 when the SPAC has its IPO into the stock market. When this happens the SPAC is simply just a pile of money, there is no knowledge of what company the SPAC is looking to merge with.

A simple explanation of a SPAC is as follows. First, an Investment firm gathers investors to create this “SPAC Vehicle”. In this vehicle, there is capital or money. The firm is in charge of that vehicle. The firm has 2 years to find a Non-Public Company that is in need of capital and this company wants to go public. When the Investment Firm creates this vehicle and finds the perfect Non-Public Company, they issue a merger proxy that tells investors and the public that the SPAC is now set to merge into the “Successor Company”. This takes time, but what a SPAC allows the company to do is layout all their financials and goals to the investor. This gives the investor time and data to make a decision on whether or not they want to invest in that SPAC. Also, if in the 18-24 months the SPAC does not find a Private Company to merge with the SPAC will be liquidated and all investor will have their money returned to them.

Basically, A SPAC merger combines the benefits of an IPO with the structural flexibility of a Merger & Acquisition.

Example

Michael is the lead banker for the firm Financial Freedom. Michael and Financial Freedom decide to create a technology specific SPAC. In this case Michael chooses a tech SPAC but there are many other options such as Fintech, Media, Sustainability, Gaming, Consumer, and many more.

Step 1: Michael gathers investors to build his SPAC. He talks to his partners and reaches out to get them to invest into his SPAC. He gathers money from investors that will one day be given to a private company who needs the capital.

Step 2: Michael now creates a SPAC called Financial Freedom Acquisition Corp. or FFAC for short. Michael was able to gather $500 million for the SPAC from his connections and investors, such as his partner Bodhi.

Step 3: Now FFAC trades on the NYSE and starts at $10.00 per share. These shares are protected by the $500 million from investors. You now as a personal investor can buy shares of FFAC at $10.00.

  • What I mean by protected is that the total worth of FFAC is $500 million dollars at $10.00 per share. This provides low risk for an investor knowing that a SPAC will not trade below $9.50 on average.
  • Once a merger is announced the stock will start to trade at a higher premium. If no merger is announced in the 18-24 months all $500 million will be returned.
  • This is why getting into a SPAC around $10.00 will provide you with the lowest risk and the greatest potential for profits.

Step 4: Michael and his team from FFAC have found the perfect non-public tech company to take public! News spreads that Michael has been talking to Elon Musk and wants to take SpaceX public! Michael announces to the public that he is going to merge SpaceX with FFAC. Along with this announcement FFAC provides a detail investor presentation that lays out the goals, financial numbers, and projected growth of the merger of FFAC and SpaceX

Step 5: All of a sudden investors realize the potential of this merger and shares of FFAC sky rocket to $20.00 per share. Investors now get to vote on the merger and decide if this merge between SpaceX and FFAC will occur.

  • The neat thing about SPACs is a firm like FFAC get to raise X amount of capital for their SPAC. But you as a personal investor get to decide what companies get more capital.
  • So now that FFAC sky rocketed to $20.00 because of outside investors means SpaceX or the company that is going to merge with the SPAC gets even more capital then originally predicted.

Step 6: The votes are counted and are successful. SpaceX and FFAC will merge in the next few days! When this merger happens your shares of FFAC with be transferred over to the new ticker symbol.

Step 7: The SPAC and SpaceX merge to become a publicly traded company under the new ticker symbol SPCX.

Personal SPAC Experience

This past summer I worked for a Boutique Investment Firm that specializes in SPACs. I was able to see what the process of SPACs are from the inside. This is a combination of gathering investors and preparing data/info for investors to make decisions of what the SPAC is trying to accomplish. I am currently invested in three SPACs and I have spoken to two investors that have been following SPACs since 2005, and what I can grasp is that SPACs can provide a safe haven for investors money. Earlier I stated that all SPACs start trading at $10.00. The lowest a SPAC will trade is about $9.50. This is strictly for SPACs, once the company has merged it is no longer a SPAC and can trade to ZERO. Also, if a private company pulls out of a SPAC when it is trading at say ~$15 or even ~$30 the SPAC will settle back to $9.50-$10.00 and this is when all investor will get there money returned to them.

Currently, one of the SPACs I own is trading at $25.00 and I got in around ~$19.50. Personally I would have liked to get in sooner but getting in early can be a risk. This is because as soon as the SPAC comes out you do not know what company it will be merging with. What I have noticed is SPACs are information-driven. News on the merger usually corresponds to good returns that day. News on an update investor presentation showing good numbers will also increase the price of a SPAC.

A SPAC has two years to undergo a merger or else the SPAC liquidates and all capital is returned to its investors. But when it is announced that a firm found a private company to merge with their SPAC, you’ll usually see some kind of jump in the price of the SPAC.

The first SPAC I own is Fortress Value Acquisition Corp (FVAC). This is a rare earth metal company that is looking to create a domestic supply line of rare earths that are using is all electric motors, wind mills, electronic breadboards, and missile technology. This is a key area because China currently owns 80% of the sector and with the current relations we cannot rely on China for support. The company FVAC is scheduled to merge with is MP Materials which was previously a bankrupt mine in California back in 2014. Since then over 1 billion dollars has been invested in infrastructure along with defense contracts asking American companies to create a domestic supply line of rare earth.

The second SPAC I owned was Forum Merger II Corporation (FMCI). This SPAC is now merged with a company called Tattooed Chef and they are publicly traded under the ticker TTCF. They are a plant bases frozen food company that was in need of capital and where looking to expand their business. They are currently cash flow positive and have been for all of 2020. They are compared to the first plant-based company, Beyond Meat.

The third SPAC I own is in its early stages of development. The SPAC is called Chardan Healthcare Acquisition II Corp (CHAQ). This is a brand new SPAC that hasn’t even announced who they are merging with.



Categories: SPACs

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