Educational Post - SPACs
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Good afternoon traders. Yesterday in my article I alerted the short trigger after Powell at $442.11 and that was an amazing trade.
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Today I placed a trade live on Twitter of VHNA which was a SPAC play. I got some questions about how this worked so I wanted to dive a bit deeper into that today.
VHNA went from $11 (my entry) and halted up twice to $17 on the same day. This may beg some questions about how exactly SPACs work, so let’s talk about that.
There are 8 big steps in SPACs I will go through.
#1) Formation - A group of sponsors (sometimes trusted industry vets like Chamath who people, well used to, trust) puts together a shell company. This company is a public company who has no purpose other than raising capital.
Example: VHNA is what I traded today is listed as a “blank check company“.
#2) IPO - the SPAC goes public via an IPO. The money raised from selling shares is held in an escrow account as the sponsors look for a target company they want to acquire.
#3) Warrants and Units - most SPACs don’t only issue shares but also warrants and they sell them as packages known as units. Warrants are basically 5 yr call options with a long expiration that trade with a strike price of $11.50 (usually). They may expire ~worthless at a price of 1 cent.
Let's say a SPAC goes public through an IPO and sells units for $10 each. Each unit consists of one common share and one-half of a warrant.
If you buy a unit for $10, you'll receive one common share and the right to purchase an additional common share (via the warrant) at a later date.
The warrant may have an exercise price of $11.50 per share and an exercise period of five years. This means that, at any time within the next five years, you can exercise the warrant to buy one common share for $11.50.
#4) Target Identification - the sponsors find a target company they would like to acquire, most SPACs are given two years to do so.
#5) Negotiations - the SPAC uses the funds in the escrow or additional financing to go ahead and start negotiations with the private company to acquire the company. This is the beginning of the deSpac process.
#6) Redemptions (where we try and make the money!) - as a SPAC investor, you can go ahead and redeem your shares for $10 + any interest if you don’t like the target company. This is where I place most of my SPAC trades.
The higher the redemption rate → the lower the float remaining for the public to trade.
#7) Shareholder Vote - as long as 50% of shareholders or more usually agree to the merger, it will go through! Donald Trump’s Truth Social is having some trouble with this…
#8) Merger completion/public trading - once it’s done, the ticker will change and the SPAC will begin trading as the brand new company on the market.
Some big examples are LCID or SOFI.
SPAC’s dont have the best performance record fyi.
Hope this helps and see you all tomorrow,
-Adit Dayal