SPAC. That’s a hot word you might have been hearing more recently in the investing world. SPAC stands for special-purpose acquisition company and some of the most recent IPO’s have been through SPACs. This video will give you the 101 of SPACs. You’ll learn what SPACs are, its advantages, and its disadvantages. Notable companies that IPO’d through SPACs include DraftKings, Nikola, and Virgin Galactic, which had seen upwards of 700% returns in just weeks after IPO. SPACs have become more popular during COVID because it’s a better guarantee of raising capital than through a traditional IPO. Here’s what you need to know about SPACs to invest in them. If you have any questions, make sure to comment below!

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What are SPACs?

SPACs stand for special-purpose acquisition company. SPACs are blank-check companies that IPO in order to raise money solely for the purpose of acquiring a private company to take public. Most SPACs seek to acquire a company within two-years before the money raised from the IPO is returned to shareholders. When a SPAC IPO’s, it cannot have a target in mind otherwise the process will end up similar to a traditional IPO.

Why are SPACs doing so well during COVID?

SPACs attract high-potential companies that draw significant attention, but have not yet demonstrated profitability. In a traditional IPO, the amount of money a company raises is dependent on how the market values the company. However, when companies IPO via SPAC, they have a much better sense of the amount of money they can expect to raise since part of the money will come from the SPAC’s IPO fund. Moon-shot companies like DraftKings, Virgin Galactic, and Nikola have attracted significant interest from retail investors driving share prices upwards of 300% in some cases.

How do SPAC units convert to target company shares and warrants post-acquisition?

Most SPAC tickers will have a “U” at the end representing the SPAC’s “units,” which usually comprise of one share of common stock and a fraction of a warrant to purchase a share of common stock in the future. Almost all SPACs IPO at $10 per unit with warrants that have a strike price of $11.50 (or 15% above the $10 per unit IPO price). One thing to consider is that only whole warrants can be exercised. Around 52 days after the SPAC’s IPO, the common stock and warrants can be traded separately, so investors can trade units, the common stock (not denoted w/ “U”) and/or warrants (denoted w/ “WS” or “W”). For example, after VTIQ’s IPO, its units traded under VTIQU, the common stock traded under the ticker VTIQ, and its warrants traded under VTIQW. Upon merging with Nikola, the target company, all VTIQ stock and warrants traded under NKLA or NKLAW. Any appreciation in the SPAC units or shares price is equivalent to appreciation in the target company value.

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This content is strictly for educational purposes, and should not be taken as financial and or investment advice. The publisher of this video assumes no responsibility for your trading performance as a result of watching one of these videos.

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