SPAC ("Blank Check Company") Investing Guide

Special purpose acquisition companies (SPACs) - also called "blank check companies" - have surged in popularity this year. That's because they are formed solely for the purpose of buying private companies and taking them public, giving their shareholders the first crack at owning exciting new companies before the IPO.

We're going to share more about how this works in a moment. We'll also help you learn how to invest in SPACs.

Market uncertainty during COVID led many companies to delay their IPOs this year. Businesses have been less confident in raising capital from public shares, so they have turned to SPACs - these blank-check companies already sitting on heaps of cash.

SPACInsider.com says more than $22 billion has been raised through SPAC offerings in 2020. That is well past last year's $13.6 billion, and the year is not even over yet.

We've already talked about a couple big SPAC deals in the last few months. The DiamondPeak Holdings SPAC merged with Lordstown Motors, giving DiamondPeak shareholders access to an electric vehicle (EV) industry expecting 687% growth over the next 10 years.

You'll find other examples of SPACs that have made promising deals below - and SPACs that have yet to make deals.

Let's go over what SPACs are, and then we'll get into how you can start investing in them to see if they're right for you...

What Is a SPAC?

SPACs are not regular companies with products or services. They are simply pools of money with a management team. And their goal is to find a worthy investment opportunity or return the money to investors.

Many SPACs are started by successful venture capitalists looking for the next big innovation or a reliable income stream down the road.

What makes SPACs so alluring is that you can often buy them just like a stock. The trick is you don't know what you're investing in until the SPAC makes a deal, but you have the chance to get your money back if you don't like the deal.

A good example of this is VectoIQ. The SPAC said it was going to focus on real estate investing. But this did not end up being the case.

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Investors in VectoIQ may have thought they were getting a real estate investment trust (REIT) or other real estate play. Instead, VectoIQ invested in a breakout industry set to pop 393% by 2027.

That's the electric vehicle industry. VectoIQ merged with electric truck maker Nikola Corp. (NASDAQ: NKLA) to take it public.

Now, that is probably not a bad thing at all. Nikola is one of the foremost names in the surging EV industry today. It popped 139% on news of the merger in June, from $33 to $79.

This was great news for investors. Of course, it was harsh when NKLA sunk back to $40. But investors still have the promise of a budding EV industry, and NKLA being one of its leaders.

SPACs typically have two years to make a deal, or it gets liquidated and the money gets returned to investors. When they make a deal, they merge with the company and usually start trading under a new ticker with that company's name.

That means if you're invested in a SPAC, you only need to sit back and wait for your position to change over into shares of the new company.

Investors also have an opportunity to get most of their money back if they don't like the deal. We'll have more on that in a second...

Why SPACs Are So Popular Now

SPACs are started by investors who are interested in making deals in specific sectors. A founder could have one or more industries in mind when starting a SPAC. But naming that industry would extend the IPO process significantly.

It's kept as a "blank check" company by the founders to avoid regulation. This works for investors willing to tolerate a certain level of unknown. And it attracts companies who want to jump through fewer hoops before going public.

This investment vehicle has gotten more popular this year, much due to market volatility from COVID-19.

Imagine, if you're thinking of taking your business public, you would probably choose a pile of cash over an uncertain IPO in this manic market. This has been a popular method for startups getting the capital they need in 2020.

The SPAC offers a solution for all parties involved, allowing big-time investors to explore and profit from their niches, giving companies an alternative to risky IPO markets, and giving individual investors an alternative to IPO investing as well.

Believe it or not, there is a third option besides SPAC investing and IPOs, which we'll get to in a moment. First, here's why you might find investing in SPACs interesting...

Why Invest in SPACs?

When you invest in a SPAC, you're hoping the company will make a promising merger deal with an existing company. If it does, your stock pops, and you could expect even further growth down the road.

As with any investing opportunity, the SPAC carries some risk. And there are also opportunities with SPACs that you can't get with any other investment vehicle.

For instance, a SPAC could be less volatile than an IPO. Because they have a faster time-to-market and are usually guided by experienced institutional investors, SPACs are not subject to the same hype-cycle that IPOs are.

Because they don't have any products or services, they have fewer hoops to jump through in their IPO. It often takes several months for ordinary stocks to IPO. But SPACs can go through the entire IPO process in as little as eight weeks.

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Instead of "shares," SPACs are typically sold in "units." A unit of a SPAC will often contain both common stock and stock warrants. You get a certain number of warrants per share of common stock, which are sort of like options to buy the stock at a certain price within a certain window of time.

A warrant is a contract that gives the investor the right, but not the obligation, to buy shares at a certain price from the company. For example, if the investor bought units of a SPAC at $10, the warrant might be for $11.50. If the stock goes to $20 after the SPAC makes a merger, the SPAC investor still has the right to buy shares at $11.50.

The way SPACs are structured, you get a certain number of warrants per share of common stock. On average, it's usually one warrant per three shares of stock. You'll see this written as a 1/2 or 1/3 warrant in the paperwork.

As SPACs began to get more attention in the last year, we saw some attractive warrant offerings at 1/2 or 1/3 warrants per share. A couple have lately tried to rock the boat as SPACs have increased in popularity, offering either 1/4 or no warrants at all.

Typically, you want warrants. But in the absence of warrants, other factors could still entice you to invest in SPACs.

How to Invest in SPACs

As mentioned, you can invest in SPACs the way you would any stock. They trade on the public exchanges. If you invest in one and it merges with an existing product or service, the SPAC will usually adopt the company's name under a new ticker.

SPAC units will typically start around $10. If it makes a promising deal, those units will pop.

A question you've probably asked when confronted with SPACs is, "What if I don't like the deal?"

Good news: SPACs offer "redemption rights" to investors, meaning they get some of their money back if they don't like it.

That should make the tradeoff a bit simpler. If you like the deal, you got in before everyone else and hopefully made a profit. If you don't like the deal, simply exercise your redemption rights.

The redemption amount is normally around $10 per share, which is what the per-unit price would have been before the IPO. Ten dollars per share is also what an investor receives if the SPAC does not make a deal and liquidates the company. Because the warrants are separated from the unit post-IPO, they remain outstanding.

So how do you invest in a SPAC that you're likely to hold on to?

There are a few ways to look at this.

You will first probably want to look at the track record of the founder. Lots of SPACs are headed by weathered venture capitalists.

For example, we wrote about Pershing Square Holdings Ltd. (OTCMKTS: PSHZF) a few weeks ago when it had an IPO in June. It's received attention because it's led by Bill Ackman, known most recently for his grim prediction of a coronavirus market crash on CNBC followed by raking in billions on futures investments.

Ackman is a savvy, experienced investor with a keen intuition for market moves, which has enabled shares of Pershing Square to remain hovering in the $20 range since going public.

Another thing you want to look at is how invested those leaders are in the deals they make. For example, VectoIQ Acquisition Corp. paid $237 million when it bought Nikola. The combined Nikola company now, with additional stake from institutional and private investors, is $3.3 billion.

Compare that to when Diamond Eagle Acquisition Corp. merged with Draftkings Inc. (NASDAQ: DKNG). Diamond Eagle paid a whopping $2.7 billion to get in on the action.

Now, both deals have their own merits. Electric vehicles are an industry worth investing in, which is why it got a lot of interest from private investment and Fidelity, who facilitated the merger. But all things equal, if your first concern in SPAC investing is the senior leadership, you would more likely want to choose the company more invested in the matter.

If you want to be even more informed, you can look up the SPAC structure, how many warrants it offers per share. As we mentioned, some SPACs offer a warrant per every three shares. Others offer a warrant for every four shares.

Now that you have some idea of how SPACs work, here are a couple of the best SPACs out there today...

Best SPACs to Watch Now

These are SPACs with solid leadership that could make promising deals in the future.

Some SPACs are names you're likely familiar with....

Pershing Square Holdings Ltd. (OTCMKTS: PSHZF) is one of the best-known SPACs we've written about as of late. The company raised $4 billion in July, which it plans to put toward unicorn startups. It offers only one warrant per nine shares of stock. But you're also paying for the security of having Bill Ackman at the helm. This company is likely to get a good deal in the future. Units are hovering around $22, which is what they debuted at. So grab it while you can.

Redball Acquisition Corp. (NYSE: RBACU) is a SPAC that likes baseball. It just completed its IPO on Aug. 13, trading at $10 per unit. This SPAC is headed by Gerald Cardinale, a 25-year Goldman Sachs Group Inc. (NYSE: GS) veteran. Cardinale was one of the brains behind the Yankees Entertainment & Sports (YES) Network. Billy Beane, the Oakland A's General Manager and subject of the film "Moneyball," is co-chair with Cardinale. Units are still trading a little above $10.

Should You Invest in SPACs?

Investors have more options than ever today when it comes to choosing investment vehicles. Depending on your investment style, SPACs could be a great addition to your portfolio.

Of course, there are a few things to keep in mind when SPAC investing. SPACs are similar to stocks in some ways, different in others.

SPACs can be risky for their unknowns. But they can also be extremely lucrative if you choose the right one. Many SPACs will be getting involved in breakout sectors like artificial intelligence, alternative energy, and electric vehicles down the road. So it's good to keep an eye out for opportunities.

In any case, stay informed about where you're putting your money. Read all the right documents. Learn the company's Net Asset Value, and know the risks going in.

When a deal shows up, don't be too committed to the SPAC. Redeem your SPAC investment if you don't like the deal. If you wouldn't buy the stock before you owned the SPAC, there is no sense keeping it under the SPAC.

There will always be some element of "rolling dice" in SPAC investing and IPO investing. But believe it or not, you might have a third option for getting in on stocks early.

Your best chance at making an informed decision comes from talking to informed people.

Instead of Googling companies and CEOs to see what pops up, you can get involved directly in a community of early-stage investing enthusiasts. This is a group of new and experienced folks that learn together and use their knowledge to find the most promising new companies today.

The 2012 Jumpstart Our Business Startups Act has made it possible for individuals form all backgrounds to become early-stage investors. That is, long before a SPAC merges with an innovative company, and long before a company even potentially IPOs.

You can actually start pre-IPO investing today. You don't have to be a wealthy venture capitalist. And you don't have to wait for companies to go public.

Just as important, you don't have to blindly guess whether a company is going to be successful or not. You can learn from some of the best angel investors in the business about how to spot a winner.

All you have to do is get plugged into this community, and you could end up like early-stage investors have in some of the biggest IPOs in history.

The only difference is this: You do not need to start with a huge amount of money to become a successful angel investor today...

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Mike Stenger

About the Author

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Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.

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