1/ SPAC 101: Why do many SPAC warrants trade at a discount to intrinsic value when commons trade into the teens? There are a number of dynamics that can impact this, but the biggest by far is the inability to short SPAC commons. Why is it so difficult to short?

2/ It is almost impossible to source *stable* stock to borrow at a *reasonable* cost. Why is this the case? Let me walk you through an example. Anpanman Acquisition Corp raises a $300M IPO.

3/ IPO investors receive 1/2 warrant for each share they purchase and the sponsor commits to purchase $8M of private warrants at $1 each to fund upfront underwriter fees and working capital.

4/ What does this look like? 30M share float, 15M publicly traded warrants and 8M private warrants. Fast forward a few months, Anpanman Acquisition Corp does a great job and nabs a $1.5B equity value company and has to raise $300M PIPE to help add cash to the balance sheet.

5/ Potential PIPE investors are brought over the wall and all decide to invest in the offering filling up 30M of demand. Some of them decide to get stable stock to borrow for a fixed amount of time and pay $$$ for it. Say 10M of float shares gets taken off the market.

6/ The deal gets announced and Anpanman stock goes crazy trading up to $20. The PIPE investors who paid $$$ for stable borrow short the shares and box their position, locking in a profit ($20 - $10 - cost of borrow).

7/ SPAC IPO investors and arbitrageurs see the public warrants trading at $5 and decide to stay/go long warrants and short stock against it to lock in a spread ($20 - $11.50 vs. $5 for warrant and cost of borrow). Maybe 5M of float shares get taken off the market.

8/ Options also get listed and option market makers take another 5M float shares to short to facilitate options trades. At this point, you have 20M shares that are short vs. the original IPO float of 30M shares.

9/ All of a sudden it's VERY difficult to borrow any stock to take advantage of the spread between the public warrants and the common stock. Anpanman stock explodes further to $30 and the warrants only move up to $10.

10/ Arbitrageurs are chomping at the bit to set up this spread, however they find out that borrow is 1) extremely expensive, say $8 per share until the deal closes AND more importantly 2) any borrow being offered is "highly unstable" stock, meaning it can be called…

11/ …back anytime. This is VERY dangerous as your short could be recalled and covered at anytime, which by the way usually happens at the worst possible time.

12/ Just ask NKLA arbs who were long warrants and short stock or short synthetically through options. I'm almost 100% certain they were the ones that were forced to cover in the $90s.

13/ So in closing, the inability to short SPACs is the main reason why warrants will lag commons until borrow becomes more available. When does this happen? First, when PIPE shares are registered and freely tradable this will add supply that can be borrowed and shorted.

14/ Second, when lockup expiry occurs 180 days (typically) after close and insiders can sell stock which will increase borrowable stock. By this point, if the warrants haven't already been redeemed, they should trade closer to intrinsic value once they're in the teens.

15/ Of course, if they trade closer to or below strike, they will trade more like options and have more theoretical value (a whole other discussion). I hope this helps!