1st Jun 2022
- SPACs are still popular among retail investors
- Deciding between individual SPACs vs SPAC ETFs needs careful consideration
- SPACs can be a risky investment
Recently there’s been a lot of buzz around SPACs investing, with many retail investors growing curious about why and how to invest in SPAC stocks. While investing in SPACs brings its own risks, it can also be an exciting and profitable way to trade on the stock exchange.
If you’re wondering how to buy SPAC stocks, we’re here to help.
What is a SPAC?
SPAC stands for Special Purpose Acquisition Company, also called shell companies or blank check companies. SPAC owners create the company to raise money to purchase a promising private company (generally a startup). In the words of James Chen, Head of Content Studio at J.P. Morgan Wealth Management, “SPACs are money looking for a promising private company to invest in.1“
SPACs have a fixed amount of time, usually 2 years, to find a target for purchase, while the money is held in safe investments. SPAC shareholders hear about the proposed deal and vote to approve or reject it, giving SPAC investors a say in the process. If no target is identified, or if the SPAC shareholders vote against the merger, the money is returned pro rata to investors. At the end of the process, the new company trades publicly on the stock exchange.
A typical investor doesn’t have the capital to take part in an IPO for new, up-and-coming companies, but they can share that energy with just a $10 share in a SPAC. Liz Ann Sonders, Managing Director and Chief Investment Strategist at Charles Schwab, observes that “For the individual investor, SPACs offer a direct opportunity for access to new companies—which has historically been reserved for larger institutions and hedge funds.2“
According to S&P Global Market Intelligence, 2021 saw SPACs raise $154 billion, a jump of 99% over the previous year3. Some of the year’s biggest deals include Pershing Square Tontine Holdings, led by Bill Ackman, purchasing a share of the Universal Music Group (UMG) in a deal worth $4.1 billion4; the 890 Fifth Avenue Partners SPAC’s acquisition of the Buzzfeed digital media company5; and Altimeter Growth Corp.’s merger with Singapore-based Grab in a deal valued at $40 billion6.
How to invest in a SPAC
There are two main ways to invest in a SPAC: either through individual SPACs, or a SPAC ETF, like SPAK from Defiance, which tracks the performance of the common stock of newly-listed SPACs, ex-warrants, and SPAC IPOs . Either way, you can find SPACs and SPAC ETFs on brokerage platforms like Robinhood or Fidelity, or through your broker.
One SPAC unit typically but not always represents one share of common stock, plus one part of a SPAC warrant, which means you have the option of buying more shares of the stock later on. SPAC shares are typically priced at around $10 per share, so if the SPAC you’re considering is trading a lot higher, investigate thoroughly. It’s not necessarily a reason to avoid it, but you need to check that the price is resting on more than just hot air.
What you need to know before investing in a SPAC
1. The risks are high
SPAC investing is risky by definition, because there’s no guarantee that the deal will be successful. “While these investments have the potential to be rewarding, they can also carry a higher degree of risk,” warns analyst Rebecca Lake. “Unlike traditional IPOs, SPAC share prices are typically not a reliable indicator of valuation. So it can be difficult to predict with any degree of certainty what type of performance you might be able to expect once the acquisition is complete,” she adds.7
SPAC deals have a much lower regulatory burden than a classic IPO, which adds to the risk. SPAC owners can include projections of future earnings, even though those may be little more than educated guesses. As a result, it’s vital to do your own research.
SPAC ETFs help spread the risk somewhat, because you’re effectively investing in several SPACs at once. However, you still need to check how many SPACs the ETF holds, how broadly they are spread across different sectors, and the ratio between pre-deal SPACs and those that have already undergone the reverse merger process, because the biggest profits can potentially come from getting in before the merger.
2. You’re writing a blank check
Not for nothing are SPACs called blank check companies. When you invest in a SPAC, you have no way of knowing which company it will acquire. Many SPACs target a specific industry or niche, like biotechnology SPACs or psychedelics SPACs, but there are no guarantees that they’ll remain in that sector.
You’re essentially relying on the judgment of the SPAC owner, which is concerning when many SPACs are run by celebrities with little financial experience, like former NBA star Shaquille O’Neal, rapper Jay-Z, and tennis champion Serena Williams8. The private company that the SPAC targets doesn’t have to release their financials until it’s part of the SPAC, by which time it might be too late for early investors9.
However, this could be changing soon. Regulators are looking closely at the SPAC market and conditions could be about to tighten, to the benefit of retail investors. “I expect regulators to take a hard look to ensure that SPAC target companies’ governance and financial reporting ability meet a standard more analogous to the IPO standard,” says Michele Connell, Global Managing Partner at Squire Patton Boggs10.
3. The market might be saturated
Some analysts are warning that the SPAC market is saturated, there aren’t enough worthy targets remaining, and performance is down. In 2021, SPACs lagged the overall stock market and underperformed traditional IPOs11. Over 60% of SPAC shareholders demanded their money back by the end of 2021, leading analysts like Sonders to conclude that SPACs may no longer be an attractive investment.12
2021 certainly saw a sharp drop in SPAC performance, with launches dropping from 317 in Q1 2021 to 106 in Q2. But they rose to 111 in Q313 and to 210 in Q414, while de-SPAC (the stage after the agreement of the deal but before there is fully merged public company) deal volume increased from 41 deals in Q3 2021 to 51 deals in Q4 202115. This led others to argue that 2021 brought a much-needed market correction, and SPACs are now continuing at a more measured and sustainable pace16.
“I don’t believe for a second that this IPO alternative is dead,” insists Matthew Frankel at The Motley Fool17.
SPACs investing could be for you
It’s clear that investing in SPACs is one of the riskier ways to invest in the stock market, but it also brings a new level of excitement. If you’re still interested in learning how to invest in SPACs or how to buy a SPAC ETF, do your research, balance your portfolio, and educate yourself about how to buy SPAC stock before you jump in.
For current performance and holdings, please visit defianceetfs.com/SPAK
1 “What is a SPAC?” November 3, 2021 https://www.chase.com/personal/investments/learning-and-insights/article/what-is-a-spac
2 “SPACs: What Investors Should Know Now” February 7, 2022 https://www.schwab.com/resource-center/insights/content/spacs-what-are-they-and-are-they-risk-to-market
3 “SPAC and Equity Issuance Finish 2021 with Strong Momentum” February 3, 2022 https://www.spglobal.com/marketintelligence/en/news-insights/blog/spac-and-equity-issuance-finish-2021-with-strong-momentum
4 “A Fintech IPO to Watch and a Very Complex SPAC Deal” June 16, 2021 https://www.fool.com/investing/2021/06/16/a-fintech-ipo-to-watch-and-a-very-complex-spac-dea/
5 “BuzzFeed announces plans to go public via SPAC, targets $1.5 billion valuation” June 24, 2021 https://www.cnbc.com/2021/06/24/buzzfeed-announces-plans-to-go-public-via-spac.html
6 “Grab Starts Trading Thursday On Nasdaq As Altimeter Shareholders Approve SPAC Deal” December 1, 2021 https://www.forbes.com/sites/jonathanburgos/2021/12/01/grab-starts-trading-tomorrow-on-nasdaq-as-altimeter-shareholders-approve-spac-deal/?sh=28417c28ba1b
7 “How to Invest in SPACs” October 22, 2021 https://finance.yahoo.com/news/invest-spacs-154024734.html
8 “Celebrity SPACs produced lackluster returns for star-struck investors this year” December 16, 2021 https://fortune.com/2021/12/16/celebrity-spac-jay-z-martha-stewart-donald-trump-investors-2021/
10 “Surging Ahead M&A Outlook 2022 and beyond” December 2021 https://www.squirepattonboggs.com/-/media/files/insights/publications/2021/12/surging-ahead-ma-outlook-2022-and-beyond/surgingaheadmandaoutlook2022andbeyond.pdf
11 “What Are SPACs and Should You Invest in Them?” January 6, 2022 https://moneyfortherestofus.com/318-what-is-a-spac/
12 “SPACs: What Investors Should Know Now” February 7, 2022 https://www.schwab.com/resource-center/insights/content/spacs-what-are-they-and-are-they-risk-to-market
13 “Things Have Gone from Bad to Worse for SPACs to Round Out the Year” December 12, 2021 https://www.nasdaq.com/articles/things-have-gone-from-bad-to-worse-for-spacs-to-round-out-the-year
14 “SPAC and Equity Issuance Finish 2021 with Strong Momentum” February 3, 2022 https://www.spglobal.com/marketintelligence/en/news-insights/blog/spac-and-equity-issuance-finish-2021-with-strong-momentum
15 “US SPACs Data Hub” January 28, 2022 https://www.jdsupra.com/legalnews/us-spacs-data-hub-5603281/
16 “Surging Ahead M&A Outlook 2022 and beyond” December 2021 https://www.squirepattonboggs.com/-/media/files/insights/publications/2021/12/surging-ahead-ma-outlook-2022-and-beyond/surgingaheadmandaoutlook2022andbeyond.pdf “2021 SPAC Activity on The Decline” December 14, 2021 https://www.appraisaleconomics.com/2021-spac-activity-on-the-decline/
17 “5 Bold Predictions for the Stock Market in 2022” December 4, 2021 https://www.fool.com/investing/2021/12/04/5-bold-predictions-for-the-stock-market-in-2022/