Buying into a SPAC before vs. after the new ticker?

[Deez_@$$ets]

There's been a number of IPOs recently that were done via the reverse merger (or whatever it is--I don't really understand the details of this mechanism for going public) by using SPACs. If there's a publicly-traded SPAC already in existence, and it is going through the process of taking some startup public, what is the difference between buying the stock of the SPAC right now vs waiting for the process to complete and buying the new stock ticker? If I buy X shares of, say, company "Example Shell Co." (ESC), and then they finish the process and a new ticker is created, say, "MadeUp New Co" (MUNC), then what happens to the X shares of ESC that I had purchased previously? Do they simply change name to become X shares of MUNC?

Just want to double-check if my understanding is correct.

 

[Deez_@$$ets]

I don't get it: why can't anyone answer this fundamental question? Isn't this one of the largest forums having to do with stocks?

 

[MasterOfCoin]

I don't get it: why can't anyone answer this fundamental question? Isn't this one of the largest forums having to do with stocks?

Well, you did post it on Xmas day, when most were probably otherwise occupied.

But I'll answer it for you.

A SPAC is specially created to be merged with or acquire another company in order to take it public.
It's usually cheaper and more importantly, faster, to do than an IPO.

It's also highly risky for Investors.

The problem is, that often, the SPAC does not specify immediately exactly what company it intends to buy, or even when.
Although the sector (ie 'renewables' or 'materials' is normally specified, like 'Bistro Bars' for instance.
It's a blind investment, very much like writing a blank cheque, initially.
As you wait, meanwhile, the SPAC shares themselves can be traded, which may considerably alter their ultimate value.

Funds are usually held in a Trust or ESCROW account, which offers some safeguards.

In your example, once the target acquisition is known, then;

The hope is, that you will have acquired shares at at or below the launch trading price and can cash out if trading demand then pushes the price upwards. {100%+ gains are not unusual}. Thus you benefit from getting the shares at a fixed pre-market price, although you probably won't know what this will be at the time of buying into the SPAC.

They are also far more accessible to small private retails investors than traditional IPO's, which are rarely available to most retail investors.

As to any shares in the example shell company [ ESC ] being acquired, they will usually be converted directly into shares of the made up new company [ MUNC } at a fixed ratio as specified in the prospectus for the acquisition. You may potentially lose the value of a few shares due to rounding if this is not 1:1. This is not permitted to be significant and will be detailed in the prospectus if applicable.

Effectively, you get an equal value of shares in the new company, at the initial market price at open at least.

I hope this somewhat clarifies for you what can seem like a very complex way of making investments.

MOC.

 

[Deez_@$$ets]

As to any shares in the example shell company [ ESC ] being acquired, they will usually be converted directly into shares of the made up new company [ MUNC } at a fixed ratio as specified in the prospectus for the acquisition. You may potentially lose the value of a few shares due to rounding if this is not 1:1. This is not permitted to be significant and will be detailed in the prospectus if applicable.

Ah, thanks! So, at the point in time when there is either a concrete announcement of a target acquisition, or just a rumor that they've started talks, it is not yet determined what the ratio of conversion of [ESC] to [MUNC] shares will be, correct? Once the deal is finalized, then we will know, right?

 

[Deez_@$$ets]

But apparently, there's an added complexity here because I don't understand the stuff about shares, warrants, and units. I read this page before your reply:

What Are SPACs and Should You Invest in Them? | Money For The Rest of Us

How do SPACs work and are they worth investing in?

moneyfortherestofus.com

But it doesn't detail the exact mechanism of what it means to buy the regular shares vs. buying the units. In another article I saw on seeking alpha, the author talks about buying units vs. the shares. Looks like the unit would be designated by ESC.U in my above example, and this trades at a slightly different price than the regular share, ESC. This is all still not clear to me.

 

[MasterOfCoin]

Once the deal is finalized, then we will know, right?

Correct.
... & at this point, a 'prospectus' would be published, outlining all the details of the proposed acquisition.

.... and this trades at a slightly different price than the regular share,

Indeed. Sometimes very different.

There are usually also set timescales or periods within which the units can be traded and obviously, the price can vary accordingly, quite separately to the share price.

Only once the units can no longer be traded can their prospective value in shares be properly assessed.

And that's assuming the deal goes through and a target company is actually acquired.


It's not until everything's been agreed signed and settled and an admission date has been published that you will have any sort of reliable notion of what you're getting for your money.

Overall, they are very high risk investments for inexperienced private retail investors to be considering.

Given SPAC’s poor track record for non-institutional investors, most individual investors should be wary of investing in them without undertaking thorough due diligence before doing so.