SPAC Warrants vs Other Warrant Compositions

By Inyoung Hwang · July 10, 2023 · 7 minute read

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SPAC Warrants vs Other Warrant Compositions

A SPAC warrant is a contract that gives a purchaser a right to purchase additional shares in the future at a set price. SPACs, or “special purpose acquisition companies,” have emerged as an alternate way for private companies to go public on the stock market. But before a company can evaluate whether or not it makes sense to go public via SPAC, the SPAC itself must “go public” and list on an exchange.

Generally, a group of individuals form a shell company and nominate a board of directors, with the hopes that investors have enough faith in their ability to source an attractive deal. They can then sell shares in this new “blank check” company. As an additional incentive for being an early investor when the SPAC debuts on an exchange, the shares, or “units,” may be comprised not only of common stock in the company, but also a warrant (whole or partial) to go along with each unit.

This benefit is only offered to early investors who buy the SPAC generally within its first 52 trading days. After the first 52 days1, units will usually split into the common shares and the warrants, with the two trading separately under different tickers.

How to Evaluate SPACs

When evaluating whether or not to invest in a SPAC IPO, potential investors often look at the qualitative aspects previously mentioned: 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 terms, or “structure,” of a SPAC deal. All SPACs are typically priced at $10 per unit, but the makeup of the units can be vastly different.

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

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SPAC Warrants 101

SPAC warrants are similar to stock warrants. Stock warrants are financial contracts that give holders the right to buy shares at a later date. Compared with stocks, warrants can be a relatively inexpensive way for investors to wager on an underlying asset, usually a stock, because they offer leverage — putting up a small investment for a potentially bigger payout.

Just like in options trading, warrants have an expiration date, so investors will need to 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.

But warrants have the potential to be incredibly lucrative for these early SPAC investors. This is because, as explained, essentially they’re buying for $10 one share plus the right to buy additional shares at a set level — what’s known as the strike or exercise price. Also importantly, 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 could 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-fourth of a warrant. This means that to own a whole warrant, the investor would need to purchase four 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 SPACs 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. 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 they 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 vastly. 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 at $11.50 each.

If the SPAC completes its merger and the shares jump to $20, our 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 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 minus $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 the market price of $20 each, for $20,000 total.

4.    Our investor pockets the difference (so $20,000 minus $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 one-half 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, so the investor buys 500 shares for $11.50 each, spending an additional total of $5,750.

4.    Investor sells all 1,500 shares immediately on the market for $20 each, for $30,000 total.

5.    Our investor pockets the difference (so $30,000 minus $15,750 = $14,250).

Here’s a hypothetical table that lays out different profit scenarios depending on the warrant composition, assuming once again 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

Investors may be surprised to learn that finding SPAC warrants is relatively easy. In fact, since SPAC warrants trade like shares of stocks or ETFs on exchanges, 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, to be certain you’re not purchasing the wrong thing.

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Using SPAC Warrants

SPAC warrants’ main utility is that they can be traded or executed – meaning they can be converted into shares. 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.

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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 with a whole warrant?

An example of a SPAC with a whole warrant could include an investor buying 1,000 units for $10,000, seeing shares increase in value to $20 each, then the investor exercising the warrants for $11.50 each, and then selling the shares and pocketing the difference.

What is an example of a SPAC with a partial warrant?

An example of a SPAC with a partial warrant could include an investor buying 1,000 units for a total of $10,000, seeing shares increase to $20 each, and exercising the warrants. Each two warrants convert to one share, so the investor then buys 500 shares for $11.50 each, selling them, and pocketing the difference.

Photo credit: iStock/FatCamera

1Investors should read all documents related to an offering as the terms of each SPAC can differ vastly.
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