A thread for new investors on how SPAC valuations upon merger work:

I recieved many comments on the $CCIV valuation thread which misunderstoood how pro forma equity ownership works. If that term is unfamiliar to you please read before investing:

1/ A SPAC holds $X in trust that it uses to acquire Y% of a private company. The SPAC issues shares which gives each shareholder a right to the money in the trust.

2/ For example. $SPAC has $100 held in trust and issues 10 shares for $10 each. If nothing happens at the end of the SPAC’s life you can exchange each share for the original $10 investment.

3/ However in all cases a SPAC attempts a merger with another company. This affects the value of each share below/beyond the $10 because those SPAC shares are converted to shares of a new unpredictably valued private company.

Let’s unpack this with an example.

4/ $SPAC uses $100 in trust to acquire 20% of $EV, a private company. Your original SPAC shares are now shares of the $EV, not the SPAC and depending on the valuation of $EV your shares may be worth more or less than $10

5/ If you think $EV is valued at $500 then 20% of it should be valued at $100 which is exactly what your $SPAC paid. Then your share of that SPAC is fairly valued at $10.

6/ If you think $EV is valued at $1000 then 20% of it should be valued at $200! Your SPAC got it for $100 and as a shareholder of the SPAC you will soon get shares of $EV for half the price you think its worth. If others agree, your SPAC shares value will rise and converge to $20

7/ For a highly valued company like LUCID SPAC’s will only get a very small % of the company as the SPAC trust size will limit how many shares of LUCID they can purchase.

For a less valued company that same trust size can purchase a very large % of their shares.

8/ Even if the SPAC shares are valued at more than $10 the money in the trust stays the same! All it implies is that people want these shares a lot as when they are converted to $EV shares they think they will be worth more.

9/ But how do you determine what they will be worth? That’s where the speculation comes in!

10/ In the case of LUCID, Bloomberg say the company values itself at $15B. $CCIV has $1.8B held in trust and will thus be able to purchase 8.33% of LUCID.

You CCIV holder will get a proportion of those LUCID shares depending on how many CCIV shares you own.

11/ If you own 10% of $CCIV shares you will get 10% of 8.33% (what CCIV bought) of LUCID i.e. 0.83%.

12/ However if Bloomberg is wrong and LUCID values itself at $30B then suddenly $CCIV trust can only purchase 4.16% of LUCID.

Hence if you own 10% of $CCIV you will now only get 0.416% of LUCID for the same amount of money.

13/ This is why valuation matters. It can radically change what % of the company you own.

14/ In essence when you buy a $SPAC share you are primarily speculating that the valuation that the bankers/founders agreed upon at merger is incorrect.

There is a lot I am omitting for simplicity but this should cover the basics. Please read and understand the product you are purchasing before you invest. If you understand nothing invest nothing until you do.

$CCIV #studystocks