Special Purpose Acquisition Companies (SPACs) have been around for decades but gained popularity in recent years after a couple of high-profile SPAC deals involving Virgin Galactic and Pershing Square Capital Management. SPACs work by raising money through an initial public offering (IPO) in order to acquire another company. If that sounds a little confusing, we’ll dig into it more later on in this article. We’ll go over what exactly a SPAC is, what investors need to know about investing in them and how to buy SPACs on Robinhood.
How to Buy SPACs on Robinhood
- Understand what a SPAC is.
Before you buy a SPAC, you should know what it is you’re actually buying. Unlike regular stocks, you’re not investing in any particular business. Instead, you’re contributing to a fund that will then be used to acquire a company. Once the company is acquired, you become a shareholder in it. It’s sort of like a blind IPO. You get in on the ground floor of a business the moment it goes public. The catch is you don’t know what company it is until the last minute.
In this sense, a SPAC is something like a single-use private equity fund. It is formed by a group of founders to raise money from public investors (you) to buy a business, the target company.
From the date of formation, the founders have 18 to 24 months to complete the acquisition. During those months, investors’ money is held in a trust. If the founders don’t acquire a target company in time, the SPAC liquidates and investors will get their money back from the trust. If they do acquire a company in time, the units investors bought are converted into shares of that company’s stock and the SPAC disappears.
For the target company, SPACs are attractive because they allow the company to raise capital and go public, all while avoiding the more rigorous and expensive process of a traditional IPO. For the founders, SPACs are attractive because founders typically gain a 20% share of the target company’s equity if the acquisition is completed.
For investors, SPACs offer a lower risk, more accessible alternative to private equity funds. You can invest in the early stages of a business while still reserving the option to minimize your risk of loss. You’ll read more about the advantages and risks investors face when buying SPACs later on in this article.
- Learn what units, warrants and shares are.
While you can buy SPACs on brokerage platforms like Robinhood, what you’re actually buying is a little different than a normal stock. Instead of purchasing shares in a company, you’re buying either a unit, SPAC share or warrant.
A unit is made up of 1 share of the SPAC plus 1 warrant to purchase stock in the target company after the acquisition. The SPAC share entitles to you a share of the trust where investors’ money is kept until the acquisition deadline.
A warrant works like an option in that you have the right but not the obligation to buy the target company’s stock. These warrants remain good for up to 5 years unless the SPAC fails to acquire a company (in which case, the warrants become worthless). However, you will still get your share of the trust in this event.
When you buy units at the IPO, they’re typically sold for $10. This is the minimum amount a SPAC is required to keep in a trust in the months before the acquisition. In those months, you have the right to redeem your money from the trust.
The more common practice, however, is to buy units on the open market. This means somebody else, usually an institution, bought them at the IPO and is now selling them to individual investors.
Once on the open market, the price can fluctuate based solely on how other investors feel about the potential of the acquisition. While the market price fluctuates, the underlying trust does not. Say a SPAC offers units for $10 at the IPO. Later, you buy units for $12 each and the SPAC liquidates. In this case, you would get $10 each back. In other words, you can still take a loss but there is a floor that your loss can’t ever fall below. The further the market price for a share or unit gets from this floor, the bigger the potential loss.
Once on the market, the units can also be split into their component shares and warrants. You are able to buy either SPAC shares, warrants or full units. You’ll learn more about how to do that in later steps.
- Know the potential outcomes.
If you plan to hold the SPAC all the way through the acquisition date instead of selling it ahead of time, there are 3 potential outcomes:
1. Your shares are converted into common stock in the target company. The company is a success.
2. Your shares are converted into common stock in the target company. The company underperforms and your shares lose value.
3. The SPAC is forced to liquidate. You receive your share of the trust.
The 1st case is the best scenario. This means the SPAC acquired a company that’s turned out to be a success. As an investor, you’ve just gotten in on the ground floor of a company for a much cheaper price than you would have in a traditional IPO.
In the 2nd case, the acquisition occurs, but the target company isn’t as successful as you hoped. The share price falls below your initial investment and you lose money.
In the 3rd case, the SPAC is forced to liquidate because shareholders voted against the proposed acquisition or because the founders missed the deadline to make the deal. You receive some money back on your investment. Depending on how much you bought the shares or units for, this could be enough to cover all or most of your investment.
If you don’t want to take the risks on holding a SPAC for the long term, you can learn more about your short-term trading options later on in this article.
- Find current SPACs.
By nature, SPACs are short-lived. As mentioned earlier, the founders of a SPAC have up to 2 years to actually acquire a company. This can make finding active SPACs difficult.
You’ll need to rely on a resource like SPAC Track’s regularly updated list of active and pre-IPO SPACs. SPAC Track provides a full list of every single active or pre-IPO SPAC, complete with the names of its founders, target industry and other helpful data.
- Search for the SPAC on Robinhood.
Once you’ve identified some promising SPACs, head over to Robinhood to find the SPAC you want to buy. This is where it gets tricky. You need to search for the specific form you want to buy. If you search by the ticker alone, you’ll only be buying shares of the trust, not complete units. If you want to buy full units, search the ticker symbol plus a “U” for units. For warrants, add a “W.”
For example, one of the hottest SPACs right now is Churchill Capital Corp IV (CCIV). Here’s what you might search for on Robinhood:
• CCIV to buy the shares only
• CCIVU to buy complete units
• CCIVW to buy the warrants only
- Place your order.
You can place an order for SPAC units the same way you would place any other order on Robinhood. Again, double-check that you’ve searched the right ticker symbol for what you want to buy. If you aren’t careful, you could end up buying shares only instead of full units or buying full units when you only wanted the warrants.
- Sell your units or warrants.
While you could buy and hold SPACs until the acquisition happens, there is a lot of risk associated with this longer-term strategy. In fact, a recent study found that as many as 50% of SPAC acquisitions end up in a loss for the investors.
Despite these 50/50 odds, there are still plenty of investors who are attracted by the high growth potential if they wind up with a good acquisition. For more conservative investors, you can still make a profit on SPACs without taking on quite as much risk if you use a shorter-term strategy.
There are 2 main ways to trade SPACs in a short-term strategy:
Option 1: Sell the entire unit.
The simplest option is to buy and sell full units just as you would sell any other stock on Robinhood. You buy it at its current market price. Then, wait for the price to increase and sell it at a higher price. This approach carries many of the same risks as any other short-term trade.
Option 2: Split the unit and sell the share and warrant separately.
The 2nd option is to split the unit into its component parts: the share and the warrant. Once the unit is split, you can then sell the shares and warrants separately on the open market. This can be a profitable option if the current market price for shares and warrants total more than the price you bought the warrant.
Say you bought a unit for $12. Later on, you see that SPAC shares are selling for $12 and warrants are selling for $4.50. If you split your unit, you can sell the shares at the $12 price and the warrants at the $4.50 price for a total of $16.50.
Splitting can get complicated, though. Each SPAC will have its own guidelines for when a unit can be split. Once the split date is reached, you can ask your broker to split your units. Some will do it for free. Others charge a fee. If your broker charges a fee, factor that into any potential profit you expect to gain from splitting your units.
While Robinhood has some great features and is particularly helpful to new investors, there are some features that it’s missing. Some of the key features the platform lacks that investors might want include:
- IRAs and other tax-deferred accounts
- No ability to invest in mutual funds or bonds
- Limited customer support
Define your SPAC Investing Strategy Today
SPACs can be a profitable part of your investment strategy, but they work a little differently than regular stocks so it’s important to do plenty of research and develop a clear SPAC-specific strategy. Doing this kind of due diligence will help keep your exposure to risk low and open the opportunity for some healthy returns along the way.