How do SPACs Work 🌱

  1. An empty shell company is created aka a SPAC, or special purpose acquisition company, and is created by some sponsor (a company or individual who owns the SPAC). The sponsor has to pay the fees of going through an IPO and getting initial investors.
  2. The SPAC sells its shares and warrants to the public in exchange for money.
    • Warrant: essentially a call option provided to early investors in the SPAC before it acquires a company. It let’s the owner of the warrant exercise the option to buy shares in the SPAC post acquiring the company. However, often times if the price of the underlying stock raises really high, then the SPAC has the right to buy the warrant back
  3. The SPAC has 2 years to acquire a company or the warrants are worthless and the SPAC needs to return the money that was given to it
  4. Suppose that the SPAC acquires some company. The SPAC investors (me) have the ability to redeem their shares (sell back their shares to the SPAC) at the cash value of the share
  5. As the acquisition happens, the SPAC issues new shares to the sponsor and/or third parties in private placements (PIPEs) to replenish some of the cash the SPAC paid out to redeem its shares
    • In a PIPE transaction, the SPAC identifies an investor or group of investors to provide additional capital to the SPAC in exchange for being issued new shares at a price typically equal to the IPO price.
  • typically about three quarters of the SPAC’s shares are redeemed;

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