SPAC Warrants and Warrant Compositions
Table of Contents
An investor in a SPAC, or special purpose acquisition company, typically buys something called units, which are like packages that include shares of common stock as well as warrants (or fractions of warrants).
SPAC warrants are similar to options in that these contracts give investors the right to purchase shares of common stock, for a certain price (the strike price), by a certain date in the future, when the warrant expires and can no longer be redeemed. Fractions of warrants must be combined in order to purchase the appropriate number of shares.
The terms of different SPAC warrants can vary widely, though, and have a direct bearing on how many shares of stock the investor can purchase, during what period, and the circumstances whereby a SPAC can redeem the warrants. Investors interested in investing in SPACs after the IPO need to verify whether they are buying common stock shares, warrants, or units.
Key Points
• A SPAC is a shell company that raises capital in order to go public, and then seeks a private company to acquire or merge with, thereby taking that company public as well.
• Investors in a SPAC purchase “units,” which include common stock shares as well as warrants.
• SPAC warrants are contracts that allow investors to buy more common stock shares as long as certain terms are met in terms of price, timing, and so on.
• The terms of one SPAC warrant can differ from another, so investors have to understand the conditions so they make the best choices.
• A SPAC can decide to redeem outstanding warrants, particularly if the stock is trading above a certain price. If investors miss the redemption period, their warrants can expire worthless.
How to Evaluate SPACs
When evaluating whether or not to invest in a SPAC IPO, potential investors often consider:
• Who is the sponsor?
• Have they launched other SPACs before?
• Have those SPACs found targets and completed a successful company merger?
• Do the board members have the experience and track records that you would expect to evaluate investment opportunities?
However, it’s just as important for investors to understand the quantitative aspect of a SPAC deal. All SPACs are typically priced at $10 per unit, but the makeup of the units can vary.
Warrants and their inclusion, or absence, in a SPAC unit can affect investor profits. A SPAC unit can have the following compositions:
• One share + one full warrant
• One share + no warrant
• One share + partial warrant (e.g., ⅓ or ½ )
SPAC Warrants 101
SPAC warrants are similar to contracts known as stock warrants.
These contracts give stock warrant holders the right, but not the obligation, to buy stocks online or through a brokerage, at a later date. But unlike traditional options, stock warrants are offered by the company itself as a way to raise capital.
Similar to stock warrants (and options), SPAC warrants also have an expiration date, so investors must pay attention if they want to exercise them. Another nuance worth noting is that when warrants get exercised, the action can be dilutive to shareholders, since a flood of new shares can enter the market, impacting the price when investors buy shares.
SPAC Warrant Details
But warrants have the potential to be lucrative for these early SPAC investors. This is because, as explained, essentially they’re paying $10 for one share, plus the right to buy additional shares at a set price — what’s known as the strike or exercise price.
Also, even if an early investor decides to redeem their shares in the SPAC before a merger is completed, they get to keep the warrants that were a part of the SPAC units.
If the company doesn’t want to issue additional shares, they may not include warrants in their SPAC units. Market conditions may also dictate whether warrants are unnecessary.
Remember: Warrants are meant to entice investors to put in their money early. If demand for the SPAC is strong enough, the company may not feel the need to issue units with warrants.
Can You Trade SPAC Warrants?
Generally, an investor can only trade stock warrants if there is a whole number of warrants. If partial warrants are issued, that fraction may not be sold. In order to sell, the investor would need to purchase additional units in order to make up a whole warrant.
Here’s an example: Let’s say a SPAC unit consists of one share and a partial warrant that’s one-third of a warrant. This means that to own a whole warrant and purchase a share of stock, the investor would need to purchase two more units.
If they were to do this, then they could trade the whole warrant, either on a stock exchange or in the over-the-counter market.
Converting SPAC Units Into Shares
Another thing likely on investors’ minds: How do SPAC units actually get converted into shares? Depending on the specifics of the SPAC, the process happens more or less automatically, and there’s no action needed on the part of the investor. That’s assuming that the SPAC does end up merging and going public.
Converting SPAC warrants into shares is a bit more involved, however. In the case an investor wants to convert SPAC warrants to shares, investors should get in touch with their broker to discuss their options.
SPAC Warrants: Merger vs No Merger
SPAC warrants can be traded after a merger — for years, in some cases. That’s somewhat theoretical, though, as there may be redemption clauses in contracts that require investors to redeem their warrants under certain conditions. It really all depends on the specific SPAC, and the guidelines outlined within the contracts governing them.
If there is no merger, however, SPACs typically liquidate the funds they raised. Investors get their money back, and warrants are more or less worthless.
Examples of SPAC Investments With Different Warrant Compositions
It’s important for investors to examine the deal structure of each SPAC closely, and investors can do this by reading the initial public offering (IPO) prospectus.
The information around the composition of the shares or units being offered is usually on one of the first few pages, but reading the entire prospectus is essential for investors to make the right investment decision for them.
In general, here are some other pertinent pieces of information relating to warrants that potential investors should be looking for when reading through the prospectus:
• The strike price
• Exercise window
• Expiration date
• Whether there are any specific conditions that can trigger an early redemption
Investors should also inspect the exact composition of a SPAC unit. Does it offer one whole warrant, no warrant, one-quarter, one-third, or one-half?
The strike price, or exercise price, of SPAC warrants is often $11.50 a share. Investors sometimes have until five years after the merger before the warrant expires. However, the terms of different SPAC deals can vary. It’s possible that the deal terms call for an early redemption period, and if investors miss exercising their contracts in that period, the warrants could expire worthless.
SPAC Unit With Whole Warrant
Let’s say an investor buys 1,000 units of a SPAC. In this case, each SPAC unit is composed of one whole share, plus one whole warrant. That means the investor now owns 1,000 shares of the merged company stock, plus 1,000 warrants to buy shares of stock at $11.50 each.
If the SPAC completes its merger or acquisition and the shares jump to $20, the investor can buy additional shares for just $11.50 each. This would be a significant discount compared to where the existing shares are trading.
Here’s a hypothetical step-by-step example of how an investor could potentially profit from exercising their whole warrants:
1. Investor buys 1,000 units at $10 each, spending a total of $10,000.
2. SPAC shares jump to $20 each.
3. Investor exercises warrants, purchasing 1,000 shares for $11.50 each and spending an additional total of $11,500.
4. Investor sells all 2,000 shares immediately for the market price of $20 each, for $40,000 total.
5. Our investor pockets the difference (so $40,000 – $21,500 = $18,500).
SPAC Unit With No Warrant
Now, imagine that same investor bought into a SPAC where the units had no warrants. That means, while the investor’s 1,000 shares doubled in value, they didn’t have the right to buy an additional 1,000 shares. Here’s an example of this scenario:
1. Investor buys 1,000 units at $10 each, spending a total of $10,000.
2. SPAC shares jump to $20 each.
3. Investor sells the 1,000 shares immediately for $20 each, for $20,000 total.
4. Our investor pockets the difference (so $20,000 – $10,000 = $10,000).
SPAC Unit With Partial Warrant
Let’s say our hypothetical SPAC has units with partial warrants. So in each unit, there’s one share attached to a ½ warrant. Here’s how this would look:
1. Investor buys 1,000 units at $10 each, spending a total of $10,000.
2. SPAC shares jump to $20 each.
3. Investor exercises warrants. Every two warrants converts to one share of stock, so the investor buys 500 shares for $11.50 each, spending $5,750.
4. Investor sells all 1,500 shares immediately for $20 each, for $30,000 total.
5. Our investor pockets the difference (so $30,000 – $15,750 = $14,250).
Here’s a hypothetical table that lays out different profit scenarios depending on the warrant composition, assuming that an investor has bought 1,000 units, that the exercise price of the warrants is $11.50, and the underlying shares hit $20 each.
| Warrants Attached to Each SPAC Unit | 1 Whole Warrant | ½ Warrant | ⅓ Warrant | ¼ Warrant | No Warrant |
|---|---|---|---|---|---|
| Units Purchased | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 |
| Number of Shares That Can Be Bought With Warrants in SPAC Unit | 1,000 | 500 | 333 | 250 | 0 |
| Cost of Exercising Warrants at $11.50 Strike Price | $11,500 | $5,750 | $3,829.50 | $2,875 | $0 |
| Proceeds From Selling Shares Acquired Through Warrant Exercise | $20,000 | $10,000 | $6,660 | $5,000 | $0 |
| Net Proceeds from Selling Shares Exercised From Warrants | $8,500 | $4,250 | $2,830.50 | $2,125 | $0 |
| Net Proceeds From Selling All Shares | $18,500 | $14,250 | $12,830.50 | $12,125 | $10,000 |
Finding SPAC Warrants
Since SPAC warrants trade like shares of stocks, and are listed by many brokerages, investors can often look them up and execute a trade like they would many other securities.
One tricky thing to watch out for, though, is that SPAC warrants may trade under different ticker symbols on different brokerages or exchanges. So, you’ll want to make sure you’re looking for the SPAC warrant you want before executing a trade.
Using SPAC Warrants
SPAC warrants’ main utility is that they can be traded or executed — meaning they can be converted into shares and, under the right conditions, sold at a profit.
So, for investors, using a SPAC warrant typically comes down to one of the two in an attempt to generate a return. There may be times when a SPAC doesn’t merge and investors get their money back, but the true utility of warrants is that they can be executed or traded.
The Takeaway
With SPAC investments, whether units come with full warrants, no warrants, or partial warrants is a quantitative consideration. All else being equal, SPACs that provide full or partial warrants offer more potential profit than SPACs that offer no warrants.
Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.
FAQ
How do you evaluate SPACs?
Investors can evaluate SPACs by looking at qualitative aspects, including who the sponsors are, their backgrounds, whether the SPAC has found a target, and what types of experiences the board members have.
What is an example of a SPAC unit with a whole warrant?
An example of a SPAC with a whole warrant means that the investor would have one share per unit, plus a warrant to buy an additional share per unit. So if they owned 500 units, they would have 500 shares and warrants for 500 more shares.
What is a partial warrant?
When an investor buys a SPAC unit, it typically includes a share of stock and a warrant or partial warrant to be applied to additional shares, at some point in the future, per the terms of the warrant contract. Partial warrants might include a ½ warrant or a ⅓ warrant. In order to redeem the warrants for a full share of stock, the investor would need to buy more units, in order to combine the partial warrants into a whole warrant that’s worth a full share.
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