If you’re dismissing or ignoring SPACs

Or if you think they’re going away

Then you do not understand them well enough

Keep Reading

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A Special Purpose Acquisition Company (SPAC)

Is a shell company formed for the purpose of purchasing a private company

The SPAC raises cash through an IPO, so when they purchase the private company, the acquired company is becomes public

Now for the interesting part

The SPAC IPOs at $10 a share

SPAC shareholders have the right to redeem their shares at $10 before the deal closes

So you are essentially back stopped at $10

These SPACs trade at a small premium to $10 while the market waits for a deal

Then one of two things can happen:

1. The market doesn’t like the deal, so the shares trade closer to $10, or remain flat

2. The market likes the deal, and shares pop

T-bill risk for equity returns

Scenario 1

Hedge funds buy the stock and start doing their due diligence on the target company

Their purchase of the stock drives shares slightly higher

They decide they don't like it, so they sell it, but never below $10

This is your worst case scenario

Scenario 2

Something like $CCIV happens

A few days ago it was trading at $10.05 because there was no deal announced yet

Then they announced they’re buying an EV company and boom

It’s above $17

You could’ve taken $0.05 of risk for $7+ of upside

Now this is an extreme example, and the markets are frothy

But it effectively illustrates the point

Another important point is that this structure allows companies to make forward looking statements, unlike a typical IPO

This get investors more comfortable with venture-stage companies – so SPACS give public market investors access to venture stage companies

I personally do not invest in them after deals are announced, but it is something new that public market investors have access to – a net positive imo

These are really fascinating products and worth looking into for all investors

This barely scratches the surface of what SPACs are and what they can do for you

I didn't even get started on the warrants piece, so I encourage you to do further reading

DM or comment with thoughts and questions

I am going down the rabbit hole on these and love the back and forth