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SPAC warrants give you the right to purchase a set of shares of stock at a specified price in the future after the completion of a merger. SPAC warrants are commonly misunderstood instruments, but you can use them to compound your account with a bit of research. Today, we’ll take a look at SPAC warrant trading, how you can invest in SPAC warrants, the benefits and drawbacks of this type of investment and some of the most commonly asked questions about SPACs and SPAC warrants.
- What is a SPAC?
- What is a Warrant?
- Difference Between Stocks and SPAC Warrants
- Pros and Cons of SPAC Warrants
- How Does a SPAC Work?
- Trading a Stock Warrant
- SPAC Warrant Expiration
- How to Find SPAC Warrants
- Exercise a Warrant
- Cashless Redemption
- SPAC Warrant Ratio
- Best Brokers to Buy SPACs Warrants
- Should You Invest in SPAC Warrants?
- Frequently Asked Questions
What is a SPAC?
A special purpose acquisitions company (SPAC), also sometimes referred to as a “blank check company,” involves an empty corporation set up by investors with the goal of eventually acquiring another company. Unlike most corporations, SPACs do not manufacture products or sell services. Instead, the only asset they typically have is the money raised through their initial public offering (IPO). Examples of SPACs include the newly launched Liberty Media Acquisition Corporation and Tortoise Acquisition Corporation II.
When investors buy into a SPAC, they have no idea what type of company their investment will become in the future. Institutional investors with a history of successful SPAC mergers can raise large amounts of capital convincing investors to take a chance on future profits when the SPAC merges with a company looking to go public. After its IPO, SPACs hold their funds in an interest-accumulating account and set out to find a company to merge with. When and if the merger is approved and closes, investors can choose to take back their original investment amount or claim shares of the new public company.
What is a Warrant?
A SPAC warrant gives you the right to purchase a company’s stock at a specific price at a specific date in the future. For example, if you purchase 100 1:1 ratio warrants at a strike price of $11.50, you have the right to buy 100 shares of that company’s stock at a price of $11.50 per share at a defined date in the future. You can also choose to sell the warrant before the date when it must be exercised. Warrants are not the same thing as call options because companies issue their own warrants, which is not the case for options contracts.
Difference Between Stocks and SPAC Warrants
Stocks and SPAC warrants are 2 completely different types of financial instruments. When you invest in a stock, you own a partial share of a company — even if it’s only a fraction of 0.1% ownership. Stocks come with privileges like voting rights and dividend distributions.
When you buy a SPAC warrant, you have the right to purchase a share of stock at a pre-defined strike price at a later date. SPAC warrants are issued by companies in an effort to raise capital, and a share is created for each warrant issued. If the strike price isn’t reached, you can choose to not exercise the warrant. Additionally, if the SPAC merger falls through, warrants become valueless and you’ll lose the entirety of your initial investment.
Pros and Cons of SPAC Warrants
Let’s take a look at the pros and cons that come with investing in SPAC warrants.
|Volatility can amplify returns. Warrants tend to show more volatility when compared to common shares of stock. This means that you have the potential to compound your profits if the merger is successful.|
Lower upfront capital investment. Warrants tend to cost significantly less than shares of common stock. This means you won’t need a large upfront investment.
|Amplified loss potential: Higher volatility can also work in the opposite direction against investors if the price of the SPAC declines or stays below the strike price.|
Time limitations: SPAC warrants have limited periods when they can be redeemed for shares, whereas stocks can be sold at any point in time assuming that buyers remain available.
Liquidation concerns: If the SPAC merger fails and the corporation liquidates, you will lose your entire investment.
How Does a SPAC Work?
SPACs work in the opposite way as traditional IPOs. Instead of a company forming around a central product or idea and then pursuing an IPO, SPACs collect money through an IPO and then search for a company to invest in. Typically, the companies that agree to mergers with SPACs don’t have the capital to pursue an IPO of their own accord.
For example, pet supply company Barkbox plans to go public under a merger with the SPAC Northern Star Acquisition Corporation. After the merger is complete, shareholders in Northern Star will have their shares and warrants transferred to shares of BARK.
Trading a Stock Warrant
Stock warrants trade exactly like shares of stocks do on most brokerages. They fluctuate in value throughout the day or week, and you can buy and sell them using a range of order types. Be aware that warrant ticker symbols may vary between brokers, so read the full name of the investment before you place an order.
SPAC Warrant Expiration
Unlike shares of stock, you cannot hold onto a SPAC warrant for an indefinite amount of time. In a few situations, you’ll need to execute or sell your warrant and some situations when your warrant can become valueless.
If the SPAC terminates before the completion of a successful merger, your warrant will become worthless. If the merger completes successfully, you can theoretically hold onto your warrant for up to 5 years. However, most warrants also include an early redemption clause that states that a SPAC can serve you with a written notice that a warrant must be redeemed within 30 days after a specific situation occurs.
For example, your warrant might include a clause that states that if the price of the stock is trading at or above $18 a share from 20 out of the last 30 trading days, management can implement an early redemption clause.
If an early redemption clause comes into play, investors have 3 options on how to move forward:
- Execute the warrant and purchase shares according to the terms of the agreement.
- Sell the warrant to another investor who will presumably exercise it.
- Allow the warrant’s clause to arrive, thus rendering the warrant expired.
How to Find SPAC Warrants
SPACs typically issue press releases before warrants arrive on the market. You can track upcoming warrant releases by following a news site like Benzinga.
If you search for the company on your broker and you don’t see a ticker on the release date, your broker may have decided not to offer access to SPAC investing. Browse our list of the best brokers offering SPAC access below.
Exercise a Warrant
If you choose to exercise a warrant, you can do so at any time. You will exercise the warrant using the same method as you would to buy a share of stock at the current market rate. SPAC warrants are very liquid, which is part of the reason why some investors prefer them to options.
If a company doesn’t need to raise cash, it may issue a cashless conversion. During a cashless conversion, your warrants automatically convert to their equivalent in shares of stock. If this occurs, you do not need to pay the strike price agreed on the warrant. Your warrants will convert automatically.
SPAC Warrant Ratio
The warrant ratio is the number of shares you can claim for each warrant that you exercise. Most warrants have a 1:1 warrant ratio, which means that you can buy 1 share of stock for every 1 warrant you exercise. Be sure to review SEC filing documents and confirm the ratio before you invest.
Best Brokers to Buy SPACs Warrants
Not every broker offers access to SPAC warrant trading. Browse a few of our favorite brokers that support the sale and purchase of SPAC warrants below.
Should You Invest in SPAC Warrants?
SPAC warrants can potentially help compound your portfolio returns. However, they can also be exceedingly risky and they may even become worthless if you allow your warrant to expire or if the SPAC liquidates its funds. Be sure to only invest in SPACs from reputable institutional investors with proven track records of success in SPAC acquisitions and mergers.
Frequently Asked Questions
Q: Do warrants automatically convert to the new company’s ticker on merger?
Yes. Just like common shares of stock, your warrant will convert to the company’s assigned ticker when listed.
Q: How long do SPAC warrants last?
Theoretically, you can hold a SPAC warrant for up to 5 years after the company’s listing. However, most SPAC warrants include early redemption clauses that stipulate that you must execute a warrant before the 5-year limit is reached.
Q. Why do SPAC warrants trade at discounts?
SPAC warrants trade at discounts because they have risks not associated with common shares of stock. For example, you cannot hold a warrant for an indefinite amount of time as you can a common share of stock.
Related content: MERGERS AND ACQUISITIONS TRAINING
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