The term SPAC stands for "special purpose acquisition company," which are non-operating, publicly listed companies whose purpose is to identify and acquire a private company using funds raised during an IPO. SPACs can be attractive to some private companies as an efficient means to raise growth capital and achieve public status on an accelerated timeline. Private companies can negotiate the valuation of their company with the SPAC management, removing some of the cost and uncertainty associated with a traditional IPO. Following the merger, the acquisition target has publicly-traded stock and access to public market financing.

Yes, investors in the IPO receive a "unit," which typically consists of one common share, generally priced at $10, and a fraction of a warrant to purchase additional shares at a higher price. Shortly after the IPO, the unit typically separates so that both the common stock and warrants trade in the open market. The value of these securities can fluctuate based on market conditions and investors' expectations or rumors about the type of company that is likely to be acquired by the SPAC. This liquidity is an advantage that SPACs offer over traditional private equity investments, where investors have their capital tied up for five years or more.

SPAC sponsors tend to be experienced business executives with a background in closely related fields such as private equity, late-stage venture capital, or M&A combined with executives with operational experience and extensive networks. SPACs with the best managers have an increased likelihood of success thanks to extensive experience in the target industry of the SPACs, which provides access to proprietary deal flow. Some SPAC sponsors also develop very active retail investor followings, Chamath Palihapitiya being a good example. Notable celebrity SPAC sponsors include NBA Hall of Famer Shaquille O'Neal and Golden State Warriors star Stephen Curry, tennis champion Serena Williams, and former pro baseball player Alex Rodriguez. Former San Francisco 49ers player Colin Kaepernick formed a SPAC focusing on social justice, while Larry Kudlow and pop star Ciara have also taken part in the blank-check boom.

SPACs look to combine with a target company that is double or triple the size of the amount of capital in the trust account, meaning that target companies with a private valuation lower than $150 million can have difficulty finding a SPAC with which to merge. Given the large number of SPACs above $300 million that have gone public in 2020 and 2021, there is intense competition for so-called "unicorns" with private valuations of $1 billion or more.

While there has been some discussion of using a SPAC to merge with a company trading at a lower valuation on an overseas exchange, this concept has not yet caught on as a practical idea

A warrant is a contract that gives the holder the right to purchase a certain number of additional shares of common stock in the future at a specific price. A SPAC warrant provides the holder with the right to buy more shares at a premium to the stock price at IPO. Investors in the IPO typically receive a unit comprised of one share of common stock and a fraction of a warrant. As an example, if the unit includes half a warrant to purchase a share at $12, and the stock goes to $15, then the warrant someone who bought 100 units could acquire 50 shares at a profit of $3 per share.

The most common SPAC warrants are either public warrants or private placement warrants. The public warrants typically have a call feature to be repurchased by the company if the shares reach a pre-determined level. Following the IPO, the warrants will trade separately from the common stock, meaning that investors can sell or exercise the warrant while holding the common stock, or vice-versa, depending on their trading strategies. Warrant holders generally do not have voting rights. Since March 2020, 59 SPACs without warrants have been filed, 24 of which are currently trading.

SPACs are attractive short targets for several reasons. They often have a relatively high market capitalization and somewhat fragmented shareholder base, making it easier to borrow shares to sell short, a fundamental component of short selling. SPACs are increasingly becoming targets for short-sellers, with the dollar value of bearish bets against shares of SPACs tripling in 2021 to about $2.7B. SPACs under investigation by the Securities and Exchange Commission and the Department of Justice are often targets of short campaigns.

Investors often ask can the common stock of SPACs go below $10 before the merger? Can SPACs go below $10 after the merger? Both are possible. SPAC shares can fall below their offer price if, for example, early investors need emergency cash and are willing to sell their shares at a loss to attract buyers quickly. That said, it's not very common for SPACs to trade very far below $10 before the merger since SPACs have a redemption feature that allows investors to exchange their shares for $10 held in trust plus interest. After the merger closes, the net asset value of the cash in trust no longer places a floor on the valuation. The price can plummet if investors believe that the deal is overvalued or if the company misses critical milestones.

Yes, SPACs need to have audited financial statements and continue to issue financial reports every quarter post-IPO. The board of directors and audit committees must fulfill their respective professional responsibilities so that companies meet their obligations under the federal securities laws to provide investors with high-quality financial reporting at the time of the merger and on an ongoing basis. Once the SPAC has identified a merger target, the private company's financials must also have an audit performed to PCAOB standards contained in the S-4 registration statement. If the company has not been subject to PCAOB audits in the past, that can cause substantial delays in closing the deal.

Research on what SPACs to invest in will help all parties evaluate the pros and cons of such specialized transactions. Discerning investors will want to know what SPACs are going public and what SPACs are available that have announced their merger targets. Subscribing to a SPACs newsletter with a SPACs calendar and a SPACs database will assist investors in determining which SPACs to look out for, sifting through which SPACs to watch Reddit for, and predicting what SPACs are going public in a given quarter.

When a SPAC successfully merges, the shareholders of the SPAC now become shareholders of the formerly private company, which will often begin trading under a news tock symbol.

SPACs with upcoming mergers can gain value when they close their mergers if investors believe the newly public company has attractive prospects, or they can fall through the "floor" set by the cash in trust if the market thinks the story is a dud. So it's beneficial to know what SPACs are merging soon and be aware that the option to redeem your shares for cash goes away once the entities merge. Resources like SPACTRACK.com offer valuable information listing SPACs without mergers, SPACs without targets, and SPACs ready to merge. After a merger is completed, shares of common stock automatically convert to the new business, offering SPACs and their targets an efficient avenue to publicly traded markets.

Yes, but the level of complexity and the difficulty of valuation increases exponentially. More commonly, a SPAC will merge with a private company, and then the newly public company may use the proceeds from the SPAC trust and PIPE investment to make one or more acquisitions after the deal closes. Such a deal may be referred to as a "roll-up strategy" as it attempts to consolidate an industry and gain scale that will yield operating efficiency, pricing power, or both. However, successful roll-ups are notoriously hard to execute.

In terms of who funds SPACs, a seasoned management team backed by a sponsor raises cash in an IPO and uses that capital to acquire a private company. SPACs can be attractive to a range of investors, including hedge funds who may apply leverage to juice up the returns and individual investors who find security in the certainty of having their capital returned, along with the potential to take part in an early-stage growth story.

The relationship between SPACs and PIPEs is complementary. When a SPAC announces an acquisition target, it typically announces it is giving all the money raised in the SPAC IPO as well as what's called a PIPE (i.e., "private investment in public equity.") The PIPE serves two essential functions. First, it serves as a "price discovery" mechanism since sophisticated institutions validate the story and valuation by putting a sizable amount of capital to work. Second, it provides certainty to the private company as to the amount of committed capital that will be available at closing, no matter how many SPAC investors choose to redeem their shares for cash. For this reason, PIPEs have become a standard feature of most SPAC mergers. However, given the volume of deals coming to market, some SPACs may need to seek to close the merger without a PIPE or go "naked."

In the IPO, how SPACs are valued typically equates to $10 per unit. Unlike a traditional IPO of an operating company, the SPAC IPO price is not based on a valuation of an existing business but rather on the value of the cash held in trust, plus interest, discounted for the time value of money. Most SPACs tend to trade close to trust value when they first go public, the most notable increase being when a business combination is announced or when there are rumors of a business combination. SPACs may trade below net asset value (NAV) when the market sentiment turns bearish on SPACs or investors are forced to liquidate cash to meet other needs. There is significantly less downside risk investing in pre-merger SPACs close to or below NAV, given that investors can always choose to redeem.

A few years ago, SPACs were a fairly obscure path to obtain public status. The SPAC model has become popular because it fulfills a need for both firms going public and investors. What SPACs have been successful has primarily been determined by supply and demand. Given that private equity and venture firms have been investing in later-stage companies and making more significant investments, this has created a pool of so-called "unicorn" companies with valuations above one billion dollars. At the same time, investors have seen the early successes experienced by some SPAC mergers and viewed the SPAC as an opportunity to take part in companies entering the hypergrowth phase. While not all of these stories will be successful, the SPAC is now established as a well-accepted path to going public alongside the traditional IPO and the direct listing process.