SPAC-IPO Archives

Q: How Do SPAC Warrants Work?

When it comes to SPACs, or special purpose acquisition companies, the investors who buy in during the pre-listing process are given “units.” Each “unit” includes a share and a warrant or a fraction of a warrant. The warrants are meant to be additional compensation to pre-listing SPAC investors for agreeing to have their capital held in a trust until the merger.

Jan

2023

Stock Warrants: What Are They and How Do I Exercise Them?

What Is a Stock Warrant? Guide to Exercising Stock Warrants

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

It’s easy to learn how stock warrants work because they’re similar to options: A stock warrant offers investors the right, but not the obligation, to buy or sell a stock at a specific price by a set date.

That said, while it’s fairly easy to come by stock options, stock warrants are less common, especially in the U.S. Some investors may be familiar with stock warrants because they’re typically part of SPAC, or special purpose acquisition company, deals.

And although warrants and options do have some similarities (e.g. there are put warrants and call warrants), they also have substantial differences. Here’s what you need to know about how stock warrants work.

What Is a Stock Warrant?

Like a stock option, a stock warrant is a derivative contract that gives the holder the right, but not the obligation, to buy or sell the underlying security at the agreed-upon strike price on or before the expiration date of the contract.

Stock warrants are issued by the company that has the stock. They’re typically used as a way to raise capital, because the cost of the warrant (the premium) and the cost per share both flow to the company.

With U.S. warrants, the expiration date is the last date investors can exercise the warrant; with European-style warrants, the expiration date is the only date when investors can exercise their warrants. In the U.S. stock warrants typically don’t expire for a period of several years.

Investors pay a premium per share for the stock warrant (typically a fraction of the share price). Investors generally buy one warrant per one share of stock, but warrants can also be sold at a certain ratio, e.g. 4 to 1 (e.g. four warrants represent one share of the underlying security).

It’s important to know the terms of the warrant, so that you know what you’re buying, how much you’re paying, what it’s worth, and when the warrant expires.

Two Main Types of Warrants

Similar to options trading, investors can buy a call warrant or a put warrant. A call warrant allows investors to purchase shares from the company by the expiration date.

A put warrant allows them to sell the shares back to the company.

Stock warrants in general aren’t common in the U.S., especially with the decline of the SPAC market (more on that below). Put warrants tend to be less common than call warrants.

The Value of Warrants

Warrants have intrinsic value and time value, similar to options. Intrinsic value is how profitable the stock warrant would be if the investor exercised it now.

The time value of a warrant, put simply, is a function of how volatile the underlying shares are, and how much time is left until expiration. The more time the warrant has until it expires, the more time it has (potentially) to rise in value.

That’s why stock warrants can be traded on the secondary market.

When an investor exercises a stock warrant in order to purchase shares, the company issues new shares, which are dilutive to the existing shareholders.

Pros of Stock Warrants

The primary advantage of stock warrants is that for a relatively small upfront investment, investors have the right to purchase shares of stock — which, if they are lucky, may increase in value and deliver a substantial profit. The downside is that the warrant can expire worthless.

However, there is an advantage in terms of time: Stock warrants are often long-term — some are five, 10, or even 15 years. Ideally then, investors can wait for the best time to exercise their warrants.

Given the longer time horizon before warrants typically expire, investors can trade warrants on the secondary market, assuming the warrant still has value.

Cons of Stock Warrants

The leverage offered by a warrant cuts both ways, giving investors the potential for big gains or big losses — so these contracts can be quite risky.

Also, an investor may be entitled to dividends or have voting rights when they purchase actual shares of stock. That’s not true when investors buy warrants. Warrants don’t pay dividends and don’t offer voting rights.

Profits from selling stock warrants are taxed as ordinary income, which can be a higher tax rate for investors vs. the capital gains rate.

Pros	Cons
The low price of warrants can lead to big gains.	Warrants can be risky, and a modest price drop in the underlying stock price can render the warrant worthless.
The longer time horizon gives investors the chance to buy/sell at the right time.	Stock warrants don’t pay dividends and don’t come with voting rights.
Investors can trade their warrants on the secondary market before they expire, if they still have value.	Profits from selling a stock warrant are taxed as income, not as capital gains.

The Complexity of Stock Warrants

Investors should bear in mind that, above all, stock warrants are not as simple as they can seem at first. In some ways the terms of stock warrants are more opaque than stock options.

If a stock pays dividends, that may lower the price of the stock warrant (as an inducement to investors, who won’t see dividends, but may see a higher payoff). But a stock warrant can also be structured so the share price incrementally rises over time, which may not be favorable to the investor.

Stock warrants are typically not considered very liquid, because there are so few of them.

Stock Warrants vs Stock Options

Warrants differ from options in a few important ways:

1. A stock option is a contract entered into by two investors, whereas a warrant is issued by the company that issues the stock.

2. Stock warrants also differ from options in that they can have expiration dates as far as 15 years in the future. Most options last for much shorter periods, and rarely more than three years.

3. Warrants are a source of capital for the issuing company, whereas options are instruments traded between entities.

4. Call warrants and options give the holder the right to buy a stock; puts give the holder the right to sell a stock. But there is a difference between put options and put warrants in that put options may be more advantageous because their price goes up when the stock price goes down. If you buy a put warrant from a company and the price goes down to zero, you may not be able to sell your stock back to the company.

Warrants	Options
Issued directly by a company	Traded between investors
Expiration dates as long as 15 years	Expiration dates typically less than a year
Source of capital for the company	Potential profit or loss for investors, not the underlying company/entity
Put warrants may be more risky than put options	Put options may be more advantageous than put warrants

How Do SPAC Warrants Work?

SPACs, which stands for special purpose acquisition companies, are shell companies that raise money by listing shares on a stock exchange, and then merging with private companies that wish to go public.

When it comes to SPACs, investors who buy in during the pre-listing process are given “units.” Each “unit” includes a share and a warrant or a fraction of a warrant. The warrants are meant to be additional compensation to pre-listing SPAC investors for agreeing to have their capital held in a trust until the merger.

SPAC Market Declines

While SPACs saw considerable interest from investors a few years ago, with billions flowing into these deals, SPACs are not without their risks and there are no guarantees for those holding SPAC stock warrants. In 2022 alone, the number of SPAC mergers dropped by 22% — and the number of canceled SPACs doubled to about 55 last year.

In addition, historically institutional investors — hedge funds, mutual funds, and pensions — have had greater access to SPAC units, since units are allocated during the private placement stage of a SPAC deal.

This has been one of the criticisms lobbed at SPACs, with detractors arguing that it gives institutional investors a better risk-reward proposition than retail traders, who typically just buy regular shares in the market without the added potential value warrants can offer.

Recommended: SPAC vs. IPO

Example of Exercising SPAC Warrants

The SPACs’ shares “separate” from the warrants usually 52 days after the initial public offering or IPO. This allows unitholders to trade the warrants and shares separately. The fees for exercising or trading warrants can be more sizable than the fees for trading shares.

Here’s a case example of how an investor may exercise their SPAC warrant. A merger between the SPAC and the target company is completed, and 52 days later, the warrants become exercisable at their strike price, which is typically $11.50 in SPACs.

So let’s say the shares of the combined company are trading at $15, so higher than the strike price of $11.50. That means investors can exercise their warrants and buy additional shares at $11.50 and immediately sell them for $15.

The investor would then pocket the difference between the exercise price of $11.50 and the current share price of $15 for a tidy profit.

But if the share price is trading lower than the exercise price, the investor is in a wait-and-see situation — and if the share price never rises above the strike price, the warrants are essentially worthless.

Important Things to Know About SPAC Warrants

While SPAC warrants can be a lucrative opportunity, it’s also important to be aware that each SPAC and the terms of the warrant contracts need to be evaluated by investors on a case-by-case basis.

Remember, warrants offer an opportunity but they can also expire when worthless. For instance, it’s possible shares of the combined company never rise above the strike price of $11.50, making it impossible for investors to exercise the warrants.

Furthermore, the regulation of SPACs and their warrants could change. In April 2021, the Securities and Exchange Commission (SEC) changed how SPAC companies can classify warrants on their balance sheet. Many SPACs have considered warrants as equity. But under the new guidelines, in certain circumstances, SPAC companies need to classify warrants as liabilities.

Many SPACs in the pipeline have had to reevaluate their financial statements in order to make sure they’re in compliance with the new regulatory guidelines. Market observers interpreted the SEC’s move as an attempt to cool the red-hot SPAC market.

Why Do Companies Issue Warrants?

The reason that companies issue stock warrants is to raise capital without selling other bonds or stock. Selling warrants also protects the company’s stock from becoming diluted, as would happen with the issuing of new stock — unless or until investors exercise them. Call warrants will dilute the shares on the market when investors exercise them.

Recommended: Understanding Stock Dilution

Because warrants are less expensive than the underlying stock, unproven companies will use them to entice new shareholders. The company makes money on the warrant sale, and on the exercise of the call warrant if the owner buys the underlying shares. And if the warrant expires, the company keeps the purchase price of the warrant.

A company may issue call warrants as a show of confidence for shareholders who want to hedge their holdings of that company’s stock. The company offers the hedge of the call warrant to reassure shareholders while raising capital from the sale of the warrant.

Sometimes, companies will also issue warrants as a way to raise capital during periods of turbulence. For example, some companies issue warrants if they’re headed for bankruptcy.

How to Find Warrants to Invest In

Not every publicly traded company offers warrants. In the U.S. the companies that tend to issue warrants are not big Fortune 500 corporations. Instead, they tend to be smaller, more speculative companies.

While there are some online databases of warrants, they’re not necessarily comprehensive and up-to-date. But if an investor has a company they’re interested in investing in via warrants, they can contact that company’s investor relations department. Investors can also go to the company website and search for the word “warrant,” or the company’s ticker symbol, followed by “WT.”

Some warrants can also be traded under the symbol that includes the underlying stock symbol with either a “W” or “WS” before it. Once an investor finds a warrant, most online brokerage accounts will allow them to buy and sell the warrant.

How to Use Warrants

For an investor who owns warrants, the first decision is when to exercise the warrant. For a call warrant, that’s when the stock price has risen above the warrant’s strike price. If it’s a put warrant, then it means the stock is trading below the strike price.

But a warrant holder has another option, which is to sell the warrant on the open market because warrants can be traded like options. This is one thing to consider if a call warrant is below the strike price. Even if it’s below the strike price, the call warrant may still have intrinsic value right up until it expires, though the market may offer you less for the warrant than you paid for it.

Even if the current stock price is higher than the strike price, an investor may choose to hold onto the warrant. That’s because the price could rise even higher before the warrant expires.

Whether buying, selling, or exercising a warrant, most brokers can help an investor get it done. Once purchased, a warrant will appear in a trading account just like a stock or option. But with warrants, like most financial derivatives, most brokers charge higher transaction fees. After the broker contacts the company that issued the warrants and exercises them, the stock will replace the warrants in the trading account.

Other Important Things to Know About Warrants

It’s important to remember that every company that issues warrants does it differently. One company may issue warrants in which five warrants can be exercised to obtain one share of stock. Another company may set the ratio at ten to one or twenty to one.

Some companies can adjust the strike price of their call warrants if the company pays out dividends. This is a twist that can benefit the buyer because warrants with a lower strike price are more likely to be exercised at a profit.

But not every contractual term in a warrant is necessarily to an investor’s benefit. There are some call warrants whose structure allows the issuing company to force investors to sell their warrants if the stock price rises too high above the warrant’s strike price. There are even some warrants whose strike price is designed to rise higher over time, which makes it less likely that an investor will be able to exercise the warrant at a profit.

While it makes sense to study and understand the fine print before buying a warrant or any investment, it’s especially important to double-check those terms and conditions when getting out of the investment, by exercising a warrant, for example.

The Takeaway

Stock warrants are a bit like their cousins the stock options — but there are some key differences to know. These often-overlooked securities can offer investors an inexpensive way to bet on the long-term success of a company. But they come with potential pitfalls, particularly when it comes to the fact that they can expire if investors don’t exercise them.

Warrants have become more topical since they’re issued in SPACs, which have seen an equally dramatic rise and fall in popularity over the last few years. In SPACs, early investors often get a share plus a warrant or partial warrant. However, investors should evaluate each SPAC and warrant carefully given the potential volatility of these arrangements.

All of that said, stock warrants are relatively uncommon as investment vehicles in the U.S. Investors can get their start by trading stocks — which is easy when you set up an account with SoFi Invest®. SoFi Invest offers an Active Investing platform that allows users to choose stocks and ETFs without paying SoFi commissions. Get started now.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

What is an example of exercising a stock warrant?

Let’s say a stock is trading at $5 per share. The company decides to sell call warrants for a strike price of $5.50 per share. If the stock price rises to $6 per share before the expiration date, an investor could exercise their stock warrants to make $0.50 per share. If the stock price drops to $4.75/share, investors would have to wait rather than take the loss — and hope for a price increase before the warrant expires.

What is the purpose of a stock warrant?

Stock warrants are generally issued by a corporation as a means of raising capital. The company sells the warrants to investors, who have a specified period of time in which to exercise the warrant (say, five years). In the above example, the company would raise $0.50 per share by selling call warrants at a slightly higher price-per-share.

How can you find a stock warrant to invest in?

Trying to find a stock warrant over-the-counter from the issuing company isn’t impossible, but it can be difficult, especially because most companies don’t offer warrants. The easiest way to find stock warrants on the secondary market is to purchase them through your brokerage account. Warrants are indicated with a W or WS added to the ticker.

Photo credit: iStock/PeopleImages

Mar

2022

What’s a SPAC?

By Beth Braverman | Growing Wealth, invest, Investing | Comments Off

Special purpose acquisition companies (SPACs) are shell companies that go public with the intent of buying a private business. Also known as “blank check companies,” SPACs have increasingly become a popular alternative to the traditional initial public offering (IPO).

Despite their popularity, SPAC IPOs have drawn criticism from those who believe they benefit SPAC insiders over retail investors, and that the businesses that they ultimately take public lack solid business fundamentals.

Here’s a rundown of what investors should know about SPACs before investing in one.

Understanding What SPACs Are

It’s important to know that SPACs go public before they have any actual business operations and before they have a target company to buy. SPACs typically have a two-year horizon to find a private company with which they can merge. If they do not find a deal, the SPAC dissolves and returns any proceeds to investors.

Interest in SPACs shot up in 2020 as many private companies, particularly ones that have reached “unicorn company” status, looked to debut in public markets, and continued in 2021. In 2021, there were more than 600 SPACs hit the market, up from nearly 250 in 2020. In 2019, there were only 59 SPACs, according to data from SPACInsider.

Some SPACs have a checkered track record, having historically underperformed the broader market, a trend that has continued in the recent boom. SPACs may also offer more favorable terms to bigger, institutional investors versus retail ones, making it crucial that the latter do their research.

Nearly half of small companies that went public in 2021 via a SPAC have not met the earnings targets that they presented to investors, according to an analysis by The Wall Street Journal. That, in turn, has potentially dampened the market for future SPACs.

How SPACs Work

Here’s a step-by-step guide to how a SPAC merger typically occurs:

1. A “sponsor” sets up a SPAC. Sponsors are typically industry experts or executives. They can pay $25,000 for a 20% stake — what’s known as the “promote” or “founder’s shares.”

2. The SPAC goes public, promising to buy one or more private companies with the proceeds from the IPO listing.

3. The newly public entity hunts for a private business to merge with.

4. When the SPAC finds a target, stockholders vote on the proposed merger. They have the option to vote against the deal.

5. If the SPAC needs more funding for the merger, stockholders who are institutional investors or private equity firms can provide the additional capital in what’s known as a “private investment in public equity” or PIPE.

6. The target company then merges with the SPAC in a “reverse merger” known as a deSPAC. The target company’s name and ticker symbol on the stock exchange, replacing the SPAC.

7. When SPACs go public, institutional investors have access to shares called “units.” Each “unit” includes a share priced at $10 and a warrant the holder can exercise when the shares reach $11.50.

So let’s say a SPAC’s shares rise to $15 each after the deal is announced, the institutional investor can exercise their warrants and net a profit from the difference between the $15 shares and $11.50 warrants that can be converted into shares.

History of SPACs

Investment banker David Nussbaum launched the first SPAC in 1993 and went on to cofound the SPAC-focused investment bank EarlyBird Capital. At the time, SPACs represented a new take on the “blank check companies” that had become embroiled in fraud and penny stock schemes in the 1980s. Over the next 25 years, SPACs remained a relatively obscure avenue for private companies to go public.

In 2009, only one company went public via a SPAC, and in the decade that followed, the numbers of SPACs per year ranged from just a handful to a high of 59 in 2019. The market saw an unprecedented boom in SPACs in 2020 and 2021, but with mixed results, some believe that the market has already peaked. By late February 2022, there had only been 44 SPAC deals, putting the year at less than half of 2021’s pace. Many SPACs that went public in 2021 have failed to find merger targets.

SPAC Examples

SPACs were extremely popular in the last few years. The deal structure has drawn a mix of famous figures as sponsors, including former President Donald Trump, billionaire venture capitalist Peter Theil, actor Channing Tatum, basketball player Steph Curry, and race car driver Michael Andretti.

Here’s a list of high-profile companies that went public recently through SPAC deals:

• Coworking space WeWork (WE)

• Mobile banking platform Moneylion (ML)

• Satellite manufacturer Spire Global (SPIR)

• Sports-betting operator DraftKings Inc. (DKNG)

• Space-flight company Virgin Galactic Holdings Inc. (SPCE)

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SPACs vs IPOs

The flurry of SPAC activity that began in 2020 comes after years of dissatisfaction with the traditional IPO process. Businesses in the United States have held off on going public for longer, even after experiencing tremendous growth.

Some startups may believe that going the SPAC route would put them less at the mercy of the stock market’s mood when it comes to their valuation when listing. The SPAC negotiates the price for the private company behind closed doors, similar to deal making for a traditional merger.

This process allows for more stability in determining the value of the stock, which is especially attractive when the stock market is volatile. In an IPO, the price is set the day before the listing and often relies on the judgment of investment bankers.

SPACs also offer a speedier way for companies to enter public markets. A merger between a SPAC and target company can take a few months, while the conventional IPO model can take 12 to 18 months, and requires extensive investment in the documentation for regulators and the roadshow for investors.

The Securities and Exchange Commission (SEC) reviews merger terms between the SPAC and the target company, similar to how it reviews IPO prospectuses. However, because the SPAC is a merger, it’s more likely the deal can be marketed using forward-looking projections, which can be helpful for fast-growing companies that aren’t yet profitable. For IPOs, regulatory rules require that only historical financial statements can be shared.

SPAC	IPO
Valuation negotiated behind closed doors like a traditional acquisition	Valuation determined the day before launch by underwriters
Process takes three to four months	Process takes 12 to 18 months
Merger terms reviewed by SEC	IPO prospectus reviewed by SEC

SPAC Pros & Cons

There are benefits and drawbacks to investing in SPACs. Here’s a look at some of them.

Pros of SPACs

There are several reasons that SPACs appeal to some investors and founders as a method of taking companies public.

Seasoned Sponsors

Some recent SPACs have had sponsors who are more prominent figures. In essence, betting on a SPAC is trusting an experienced executive to suss out an underappreciated business in private markets and bring them to public markets.

IPO Alternative

Startups have increasingly shunned the traditional IPO model, calling it expensive, time-consuming, and onerous. SPACs have become an alternative for some to go public in an often cheaper, faster way.

Navigating Stock Volatility

SPACs are one way that private companies can manage choppy trading in the stock market, since they can privately negotiate valuations and deal terms.

SPAC 2.0

SPACs were once considered the “backwater of the stock market” and associated with penny-stock schemes. However, some of the more recent ones have featured seasoned executives, investor protections such as time-restricted warrants, and sponsors with more skin in the game.

Retail Participation

Retail investors can potentially get in on a deal at $10 a share. In a traditional IPO, they have to wait until the shares hit the public market after getting priced. Buying a company before it goes public does provide an opportunity for a potentially higher profit if the company eventually succeeds.

Cons of SPACs

While there are some potential advantages of investing in a SPAC, there are also important risks to understand.

No Deal

With SPACs, there’s always the risk that the SPAC can not find a company to acquire. While in such cases investors do get their money back, plus interest, they may have preferred to put their money elsewhere during that time period. And because so many SPACs went public in the last two years, there’s now much greater competition for companies to buy, increasing the risk that they’ll overpay for targets or be unable to find one.

Underperformance

Many of the SPACs that have recently gone public have failed to live up to their projections. Short sellers — investors in the market who bet that a stock’s price will fall — have already started targeting SPACs.

Sponsor Payout

Some observers believe that the 20% stake paid to sponsor has been deemed by some observers as too lucrative.

Risk of Dilution

The warrants given to institutional investors who buy into SPACs can potentially dilute others when the warrants are exercised.

Potential Retail Disadvantage

When institutional investors participate in PIPE deals, they’re typically told the potential acquisition company. While this is legal, it’s potentially one way SPACs can favor bigger investors versus smaller ones, who are often left in the dark.

More Regulation?

New SEC Chairman Gary Gensler has hinted that the agency is interested in increased oversight over SPACs, potentially reviewing them in a manner similar to its IPO reviews.

SPAC Pros and Cons Summary

SPAC pros	SPAC cons
Seasoned sponsors lend legitimacy	SPAC could fail to acquire a company
Alternative route to IPO	Despac companies have underperformed
Ability to negotiate deal terms in private	Terms favor institutional over retail investors
Some investor protections	Risk of dilution through warrant execution
Retail investors can participate	Potential for more regulation

The Takeaway

SPACs have surged in the past few years, attracting many prominent figures to become sponsors as well as private companies looking for an alternative route to listing shares publicly. Even exchange-traded funds (ETFs) — tradable baskets of stocks — that invest exclusively in SPACs have cropped up.

While often described as a simple reverse merger, SPACs can be more complex than they seem at first glance. Investors can benefit from doing their due diligence, researching the sponsor’s incentives and understanding the terms for the warrants. Interested investors can purchase SPACs for as little as $10 per SPAC unit by opening an account on the SoFi Invest® brokerage platform.

Get started with SoFi Invest® today.

FAQ

Are SPACs good investments?

You’ll need to evaluate each SPAC based on its specific characteristics. While many SPACs have underperformed the market, others have performed in line with expectations.

How do SPACs work?

SPACs are shell companies, typically led by industry experts, that go public with the sole intention of acquiring a private company and listing it on an exchange. If investors in the SPAC approve the merger, the companies combine, taking the name and ticker symbol of the newly private company.

How can I buy SPACs?

You can buy SPACs through an online brokerage account like SoFi Invest®. One unit in a SPAC typically sells for $10.

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Dec

2021

SPAC IPO vs Traditional IPO: Pros and Cons of Investing in Each

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

While sometimes described as a “backdoor” to going public, SPACs have emerged as a major contender to the traditional IPO.

About $60.2 billion in SPACs debuted on the U.S. stock market in the first two months of 2021, far outpacing the $24.4 billion raised by IPOs in the same period, according to a report by the Securities Industry and Financial Markets Association (SIFMA).

In 2020, SPACs represented 97% of the total money raised in IPOs, the SIFMA data show. That compares with just 9.9% in the decade through 2019–a sign of how momentum behind this deal structure has intensified only recently.

While the popularity of SPACs is irrefutable, investors sitting at home may be wondering if they should buy into this trend and whether SPACs represent a better investment than regular IPO companies. Here’s a deep dive into how both SPAC IPOs and traditional IPOs work, as well as what to consider before investing in either.

SPACs vs IPOs

What Is a SPAC IPO?

SPACs, which stands for special purpose acquisition companies, are shell companies that raise money by listing shares on a stock exchange. They have no operating business–so no gadgets or widgets to sell, no services to offer–but instead go public with the sole intent of finding a private company to merge with.

Once a target company is found, the two businesses–the already public SPAC and the privately held company–merge. Through this merger, the private business goes public and gets listed on the stock exchange.

Here’s a step-by-step on how SPACs work with additional details:

A “sponsor”–typically industry professionals or executives–sets up a SPAC. They can pay $25,000 for a 20% stake in the company–what’s known as the “promote” or “founder’s shares.”

The SPAC lists on a stock exchange with a ticker symbol, raising money through the process. By convention, each SPAC share almost always sells for $10 apiece.

The SPAC hunts for a target business to buy. They usually have two years to complete this search. Otherwise, the money raised in the IPO gets returned to shareholders, typically with interest.

If a target business is found but more money is needed, more institutional investors may be brought in, in what’s known as a PIPE or private investment in public equity.

Stockholders have the right to vote on the proposed merger with the target company. If approved, the merger is completed, and the target company’s new ticker replaces the SPAC’s ticker.

Why Do Companies Go Public With SPACs?

In recent years, company executives–particularly ones from Silicon Valley leading unicorn companies–have complained about the traditional IPO process. Here are some reasons some CEOs have preferred the SPAC route to go public.

1. Faster timeline: A merger between a SPAC and its target can take between four to six months, whereas a traditional IPO can take 12 to 18 months.

2. Less expensive: In a traditional IPO, the cost of hiring the investment bankers or underwriters alone can be 4% to 7% of the IPO’s entire proceeds.

3. To avoid volatility: Traditional IPO valuations can be subject to the mood of the stock market at the moment. Meanwhile, the valuation of the private company in a SPAC deal is typically done in private negotiations, which might help avoid the ups and downs of public markets.

4. Regulatory oversight: The SPAC structure currently allows companies to market themselves using more forward-looking projections than traditional IPOs, which may be preferable to companies still in the earlier growth stage.

Benefits of SPACs

1. Warrants: When institutional investors buy SPAC shares, they technically get shares that are called “units.” Each unit typically includes a share priced at $10 and a warrant or a fraction of a warrant that can be exercised when the shares reach $11.50. Some brokerage firms have been allowing retail investors to purchase units as well.

2. Getting in early: SPACs allow retail investors to potentially get in early–so before a target company has been announced–and at just $10 a share.

3. Experienced sponsors: Prominent sponsors have been a key feature in the recent wave of SPACs. Such sponsors could be helpful, experienced advisors to younger companies and may be skilled at finding undervalued private businesses to bring to public markets.

4. New structures: Some criticism has been lobbed at the SPAC structure, and some deals have failed to materialize or handed investors lackluster returns. However, some of the more recent SPACs have attempted to address these issues with investor protections.

Risks of SPACs

Here’s what to know about SPACs when it comes to their risks:

1. Failure to find a target: While SPACs pledge to buy a target company when they go public, some fail to do so in the two years they have to find a business. Though investors would get their investment if the two years goes by without a deal, it would still be money that could’ve been invested elsewhere.

2. Dilution risk: While investors can buy shares of a SPAC at $10 when it goes public, there’s a risk that additional funding, such as the PIPE investment, to fund a deal could dilute their stake. Furthermore, warrants getting exercised also pose another dilution risk.

3. Greater regulation: The Securities and Exchange Commission (SEC) announced new accounting mandates in 2021 for SPACs, increasing oversight of the deal structure. Some market observers say greater regulation could be on the way.

4. Lackluster performance: Shares of SPACs have been volatile in 2021 as investors have been disappointed by the performance of some of these new companies.

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What Is a Traditional IPO?

An initial public offering or IPO is the process of a private company offering shares for sale to the public. This is typically done through “listing” shares on a stock exchange, where investors can then buy and sell stakes in the company.

Historically, IPOs have been an important milestone in the American business landscape, signaling a company’s maturity and growth. After going public, companies typically face greater scrutiny both from regulators and investors on their performance and financials.

Here’s how a traditional IPO generally works:

A private company typically starts by hiring investment bankers. The process by which investment bankers handle and advise an IPO is called underwriting.

The underwriter helps the company file its S-1 prospectus with the SEC, a document that includes financial data, financial projections, descriptions on what the proceeds of the IPO will be used for, as well as potential risks to the deal.

If the IPO is approved, underwriters typically hold “roadshows”–events in which they present and pitch institutional investors on the company and IPO deal. If institutional investors are interested in buying, underwriters will allocate them a proportion of the shares.

Before listing day, stock exchange and ticker symbol are chosen by the company with the help of the underwriter. The underwriter will then buy shares from the company before transferring them to the public market.

Trading commences on the listing day. Oftentimes, there’s an IPO lock-up period, a stretch of time during which senior executives and early investors aren’t allowed to sell their shares in the open market.

Why Do Companies Go Public With Traditional IPOs?

Companies have traditionally gone through IPOs in order to raise additional money, provide an exit opportunity and greater liquidity for early stakeholders, and drum up more publicity.

Meanwhile, here are some reasons why a company may choose a traditional IPO as opposed to a SPAC IPO:

1. Sponsor promote: As mentioned, sponsors get a 20% stake of the company’s common equity in SPACs. For companies that don’t want to give up this stake, the traditional IPO may appear to be a better option.

2. Regulatory uncertainty: The SEC has already changed some of the regulatory requirements of SPACs and more changes could come. Meanwhile, for IPOs, the regulatory requirements have been in place for much longer and are designed to protect everyday investors.

3. Cooling enthusiasm: SPAC shares have had a mixed performance in 2021, given the regulatory uncertainty and disappointing performances by some companies. Some startups may want to avoid being grouped with such SPACs.

Benefits of Traditional IPOs

1. Get in early: Traditional IPOs can represent an opportunity to invest in a newly public company in its early stages.

2. Stable regulation: Regulations of traditional IPOs are still a tried and true model relative to oversight of SPACs, and they’re designed to protect retail investors.

Risks of Traditional IPOs

IPO investing is known to be risky. Some of the most famous examples of investors losing money from IPO investing come from the late 90s and early 2000s when the tech-bubble was raging. Dozens of companies that weren’t yet profitable and sometimes had questionable business models went public, and some individuals suffered losses from these investments.

1. New companies: Businesses that choose the traditional IPO route are still new companies that are untested in their business models and by public markets.

2. Stock volatility: While underwriters try to ensure a first-day pop in an IPO, shares of the company may experience volatility or decline in the weeks or months after listing. Also, a risky period tends to be after the lock-up expires. Early stakeholders selling shares could cause wild price swings in the stock.

Investing in SPACs vs Traditional IPOs: How to Choose

Here’s a run-down of key attributes for both groups when it comes to investing.

Ease

Buying IPO stocks and SPACs is relatively the same and easy for most investors. All that’s typically required is a brokerage account and the ticker symbol.

Additionally, the warrants that are part of SPAC units generally start trading 52 days after the IPO.

Prices

SPAC shares are typically priced at $10 apiece. The relatively low share price might make it more accessible to individual investors. However, IPOs are also rarely priced high and this is by design, since underwriters try to underprice shares so that they have an impressive “pop” on the first day.

Regulations

SPACs have had more regulatory flexibility when it comes to making forward-looking statements, making it important for investors to weigh the realistic business outlook of the businesses. Investors are also dealing with greater uncertainty with SPACs when it comes to future regulation down the road.

Meanwhile, the regulatory rules for traditional IPOs have been fairly well known and stable, and they’re designed to protect unsophisticated retail investors.

Taxes

The De-SPACing process is either when the merger with the target company is completed or if capital is returned to shareholders. Remember, SPACs generally have two years to find a target company to merge with. If it fails to merge, the SPAC is dissolved and investors get their investment money back plus interest.

How the investor is taxed depends on whether they incurred a gain or loss when the money is returned to them and how long the investment was held for.

Remember, in the US, when you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. Longer than a year, and it’s considered a long-term capital gain. Long-term capital gains tax rates are lower–either 0%, 15% or 20%–and depend on the investor’s income bracket.

When it comes to SPAC warrants, when an investor exercises them, the difference between the strike price and the price of the share is taxable income. This is typically taxed as ordinary income and so at a higher rate.

Fees

For the investor, trading costs should be relatively similar. Many brokerages these days also offer zero commission trading, meaning investors can buy and sell shares without incurring costs from the brokerage.

However, brokerages may charge higher commission fees for exercising or trading the warrants that are part of SPAC units. Investors can ask their brokerage firms about what these costs might be.

The Takeaway

Both SPAC IPOs and traditional IPOs are ways for investors to make bets on newer companies. In 2020, SPACs became a more prominent way for companies to go public and a popular investment vehicle. However, some of the enthusiasm cooled in 2021 amid lackluster performance by some businesses and regulatory warnings.

With both SPAC IPOs and traditional IPOs, investors can benefit from always doing their research: looking into the sponsors, key executives, business model, as well as the performance of the company and its industry. Both SPACs and traditional IPOs tend to be newer companies that have been less tested when it comes to their business model and public market reception, making them vulnerable to price volatility.

SoFi Invest allows eligible users to buy into companies before they begin trading on a stock exchange through the IPO Investing service. Investors can set up an Active Investing account to get access to IPO shares, company stocks, exchange-traded funds, as well as fractional shares.

Get started on SoFi Invest today.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Mar

2021

What You Need to Know About SPACs Before You Invest

By SoFi | Growing Wealth, invest, Investing | Comments Off

It seems like the word “SPACs” is in every other headline these days. Odds are, if you turn on the news or browse a business website, you’re bound to run into this strange acronym.

So what does it mean? “SPAC” stands for “special purpose acquisition company,” and it’s a business entity that’s being used to take private companies public. Basically, companies that want to have an initial public offering (IPO) are using SPACs to make it happen. SPACs themselves are publicly traded, and some investors are buying SPAC shares in an effort to get in as early on companies.

Recommended: How Do SPACs Work?

But SPACs, like many investments, are not something you want to jump into without doing some homework first. Below, we’ll cover the basics of SPACs, how they work, and what investors should know before plunking down dollars to buy SPAC shares.

SPAC Recap

SPACs are legal business entities that don’t have any assets or conduct any sort of business activity. In effect, they’re empty husks. That’s why they’re often called “blank check companies.”

As for their purpose, SPACs are used more and more frequently these days to take companies public. So instead of going through the traditional IPO investing process, many companies are instead using SPACs to get themselves listed on the stock markets.

In fact, over the past two years, SPACs have been used to take more companies public than during the previous ten years combined. Recognizable brands are using SPACs to go public, including sports betting company DraftKings, spacecraft venture Virgin Galactic, and food company Whole Earth Brands.

SPACs and Acquisitions

As for how a SPAC takes a company public, the process is basically a reverse-merger, when a private business goes public by buying an already public company.

Here’s a step-by step: A SPAC goes public, selling shares and promising to use the proceeds to buy another business. The SPAC’s sponsors sets its sights on a company it wants to take public—an acquisition target. The SPAC often raises more money to acquire the target. Remember, SPACs are already publicly traded, so when it does acquire a target, the target is absorbed by the SPAC and then becomes public too.

Why would a company want to use a SPAC transaction to go public rather than go the traditional IPO route? The simple answer is that it can be much faster and easier. For instance, a merger between a SPAC and its target can take between four to six months, whereas the traditional IPO route can take 12 to 18 months.

How Do I Invest in SPACs?

SPACs are designed to raise money so that they can acquire their target. To raise money, they need investors, which is why they’re generally publicly traded. Since they’re publicly traded, it’s pretty easy to invest in SPACs—in most cases, a brokerage account is all that’s required.

Buying SPAC shares is pretty much the same as buying any other stock. Plug in the name of the SPAC, and put in a market order. SPACs tend to sell their shares for $10 each, making them more affordable to the average investor, who may not have the cash to buy another tech IPO or an already pricey mega-cap stock.

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5 Things to Know Before Investing in SPACs

Before you plunk down your hard-earned dollars on what could be a risky investment, run through this list of considerations. Investing in SPACs may be relatively easy, but it’s important to keep in mind that they are often risky and unproven. Here are some things to take into account:

1. Failure to Find Target

SPACs really exist for one reason: To acquire a target company and take it public. But there’s a chance that some could fail to do so—something that prospective investors should take seriously. The clock is ticking, too. If a SPAC does not acquire a target within a specific time frame–typically two years–it could liquidate.

For investors, that means getting your money back, thankfully. But the money that had been sitting in SPAC shares for two years likely would have been otherwise invested—possibly causing investors to miss out on gains.

2. Investor Dilution

SPAC investors also run the risk that their shares could be diluted, or lose value. Though an investor may buy into a SPAC at $10 per share, the SPACs sponsors—the folks running the SPAC—may throw in additional funding that can erode the value of those shares.

That dilution typically happens during the merger process. As the merger takes place, fees are paid, warrants are exercised, and the SPAC’s sponsor receives 20% ownership in the new entity. All this can take ownership from investors’ shares, diluting them.

3. Poor Performance

Many companies that go public via a SPAC transaction don’t do so well after the merger. Their stock values don’t perform as many investors have hoped. This is yet another very real risk that SPAC investors must contend with.

As SPAC targets are private companies, investors can be limited in the amount of research they can do on the targets. Their financials may be difficult to find. As a result, investors are basically relying on the due diligence of the SPAC sponsor. So there’s an element of trust at play.

But what investors should know is that many companies that have gone public through a SPAC underperform compared to the broader market at large.

4. Big Names Can Cloud Investor Judgment

It can be easy to get caught up in the hype around certain SPACs. Whether the SPAC itself is targeting a particularly noteworthy company to take public, or if it’s being managed by a big-name investor or famous person, the glitz and glamour may blind investors to certain risks.

It may be fun to think that you’re getting in on an investment with a celebrity. But that doesn’t mean that the investment they’re attached to is a good one or the right one for you.

5. Uncertain Future

SPACs are the hottest thing on the market right now but that won’t last forever. And since there are some significant risks involved in investing in SPACs, it may only be a matter of time before regulators step in and make some changes.

Given the lack of transparency around SPACs and the general fast-and-loose approach that the markets are talking to them, the government and other watchdogs are already calling for some reforms.

Among them: Tamping down on SPAC hype, like protecting investors from misleading information or expectations, enhancing disclosures, and being more forthcoming about the risks to investors.

The Takeaway

There’s a lot to consider about SPACs from an investor’s point of view. The important thing to remember is that SPACs are speculative, risky investments. Just because you’re hearing about them daily, and seeing celebrities get in on the frenzy doesn’t mean that they’re the right investment for your portfolio.

Investing in SPACs will likely require a high risk tolerance for most investors, and it’s a good idea that you have your other financial ducks in a row before dedicating any money to it.

Whether you’re looking to invest in SPACs or bolster your portfolio with some blue-chip stocks, SoFi’s Active Investing platform allows you to get started. Sign up today and start trading with no commission.

Get started on SoFi Invest today.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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Mar

2021

Why Are SPACs Suddenly So Hot?

By SoFi | Financial Topics, Growing Wealth, invest, Investing, Terminology | Comments Off

Special Purpose Acquisition Companies (SPACs) have been all the rage on Wall Street. Almost 250 SPACs went public in 2020–four times as many as the prior year. And so far in the first two months of 2021, the pace has accelerated, with about 200 SPACs already launched.

SPACs are shell companies that list on the stock market with the intention of finding an existing private business to buy. Also known as blank-check companies because they have no operating business of their own, SPACs typically have two years to purchase a target.

The current SPAC boom is unsurprising given the long-time dissatisfaction with the traditional IPO model. Private companies, especially tech startups in Silicon Valley, have grumbled for years that the IPO process is expensive, onerous, and time-consuming. Many have been staying private for longer, taking advantage of other avenues for raising capital such as venture capital firms.

In 2020 however, financial markets have been on a tear, with prices of everything from stocks, commodities to cryptocurrencies surging. This has made some companies eager to take advantage of the market euphoria and go public. Rule changes by stock exchanges over the years have also made it easier to list via SPACs.

Throw into the mix high-profile sponsors, and it’s all fueled the latest SPAC craze. (Full disclosure: SoFi announced in 2021 a merger with a SPAC.)

Below is a step-by-step guide to how the current SPAC resurgence came about.

SPACs 101

Here’s how SPACs work:

1. The first step tends to involve sponsors, generally former industry experts or executives. They typically pay $25,000 in what’s known as the “promote” or “founder’s shares,” obtaining a 20% stake in the company in return.
2. The SPAC goes public on a stock exchange, listing shares at $10 each and promising to use the proceeds to find a private company to merge with.
3. Once an acquisition is found, shareholders of the SPAC vote on the company merger.
4. SPACs can buy firms valued at five times the money raised in their IPO. Therefore, additional funding is often raised through institutional investors in something known as a “private investment in public equity” or PIPE.

For the private company getting bought, SPACs offer a cheaper, faster route to listing. Below are some potential benefits of SPACs:

•  In a regular IPO, investment bankers, who advise companies in going public, alone can eat up 4% to 7% of an IPO’s proceeds in fees.
•  The IPO process typically takes 12 to 18 months. In contrast, a SPAC merger takes between four to six months.
•  Regulators review SPAC mergers, but more forward-looking projections can be used to market the deal as opposed to IPO prospectuses, which require that only historical figures be shared. This can be particularly appealing to more futuristic ventures like those in electric vehicles or space travel.
•  The valuation of a SPAC target is typically determined by private negotiations behind closed doors, similar to how a deal in a merger would be struck. This can make SPAC IPO valuations less tied to the whims of public markets.

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SPAC Performance

Critics of SPACs argue that they are much too lucrative for the sponsors and bypass measures in the traditional IPO process that are designed to protect investors. Some have also warned that the flurry of SPAC launches point to a bubble.

However, defenders of the structure argue that this most recent wave of SPACs is different. They say the latest batch has more credible sponsors, who then in turn target higher quality companies.

In addition, some SPACs, like hedge-fund manager Bill Ackman’s, have tweaked the structure. Ackman’s company will forgo the founder’s shares, which have been a controversial SPAC feature, according to reporting by the Financial Times. Instead, he’ll get 6.7% of the merged company, only after investors earn a 20% return.

An academic paper by professors at Stanford and New York University law schools looked at SPAC acquisitions between January 2019 and June 2020. The study found that companies that went public by SPAC fell by an average of 3% three months after debuting, 12% after six months, and 35% after a year.

Meanwhile, those with high-quality sponsors returned 32% after three months and 16% after six months. When it came to companies with higher-quality sponsors that had been public for at least a year, there were only seven and they fell on average by 6%. The professors concluded that, “It is true that a few SPACs sponsored by high-profile funds or individuals have performed well. But these are the exceptions, not the rule.”

How the SPAC Boom Came About

Here’s a table that shows the number of SPAC IPOs by year and the capital raised. It shows that the number of SPACs that have listed on the stock market have steadily increased in recent years.

Only 13 debuted in 2016, but more than 200 launched in the first two months of 2021. The number of SPACs in the stock market really jumped in 2020, quadrupling from 59 to 248. The table also shows the money raised through these IPOs has also climbed dramatically, with SPACs amassing $83 billion in 2020.

Year	Number of SPAC IPOs	Money Raised by SPACs
2021 (through March 2)	204	$64.6 billion
2020	248	$83 billion
2019	59	$13.6 billion
2018	46	$10.8 billion
2017	34	$10 billion
2016	13	$3.5 billion

Source: SPACInsider

What’s Driving the SPAC Boom?

1. IPO Dissatisfaction

IPOs have historically been an important step for maturing companies, signaling that a business is ready for public scrutiny, greater regulation, and increased liquidity of its equity.

However, in the past decade, tech IPOs haven’t always kept pace with the number of unicorn companies that have cropped up. Private companies have shunned the traditional listing process by either staying private for longer or seeking alternative routes such as direct listings or SPACs.

2. Booming Markets

After the volatility in early 2020 caused by the pandemic, financial markets have soared. Investors have wagered that easy Federal Reserve monetary policy, along with numerous Covid-19 stimulus packages, will continue to prop up the economy as well as asset prices.

In addition, retail investors stuck at home due to the pandemic’s quarantine have enthusiastically returned to equity markets. All this has created a potential optimal window for private companies to enter public markets, giving them better odds of pricing SPAC deals at higher valuations.

3. Rule Changes

Both the New York Stock Exchange and the Nasdaq have tried to loosen its rules on SPACs in recent years in order to attract more such listings. Nasdaq had dominated the SPAC market until 2017, when NYSE had the first blank-check listing on its main market, after getting approved by regulators to ease some requirements. Separately, Nasdaq tried in 2017 to gain permission to lower a number for required shareholders.

4. Famous Sponsors

Well-known sponsors have been a defining feature in this recent SPAC wave. Well-known investors, past politicians and former athletes have all jumped on the SPAC bandwagon, setting off a flurry of launches.

The Takeaway

Media outlets dubbed 2020 the “Year of the SPAC,” but some of the conditions that have turned SPACs into a popular IPO alternative have been in place for a while. Private companies have been long unhappy with the traditional IPO model. Meanwhile, the mood in the stock market has become increasingly ebullient, luring private companies into public listings. But famous sponsors–the managers behind SPACs–have been one of the key features of the recent wave.

SPACs have a checkered history when it comes to actual performance in the stock market. But some market observers have claimed that having more credible sponsors will lead to better mergers and consequently, better share prices. At least one academic study shows it’s too early to gauge whether having higher-quality sponsors will make a difference, however.

With a SoFi Invest® online trading account, users can make zero-commission trades on stocks, exchange-traded funds or fractional shares. Members also get access to Pre-IPO Investing and get help building investment portfolios and setting their financial goals.

Open an account with SoFi Invest today.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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