Special purpose acquisition companies, or SPACs, are a powerful investment opportunity in 2022. What is a SPAC, and what are the best SPACs to buy right now? Keep reading to find out.
What Is a SPAC?
A special purpose acquisition company (SPAC) is essentially a shell corporation or “blank check company” whose sole purpose is to raise money to acquire one or more businesses or assets.
A SPAC, by definition, does not engage in commercial operations.
The acquisition target companies are usually privately held, and acquisitions happen through a reverse merger or a purchase agreement.
Often, SPACs are called blank check companies because they are just that: funds from investors sitting in escrow until a company is acquired.
What You Should Know About SPACs
In the past, many investors avoided SPACs, thinking they were too risky.
The SPAC process presents a scenario of reduced regulatory scrutiny compared to the traditional Initial Public Offering (IPO).
Because of this, many retail investors consider SPAC stocks to be a sneaky back door into the public markets.
However, the year 2020 turned the concept of SPACs on its head.
Now, private companies in big tech are using this once shady vehicle to keep funds away from banks and hedge funds, primarily due to a costly IPO process.
Many large tech companies have felt like their loyal employees, some of whom have been around since the garage days, lose out when their company goes public.
This is where SPACs come in — after all, they are good enough for Bill Ackman and Richard Branson.
However, Jim Cramer recently told his viewers the SPAC era could be reaching an end. Is this really the case though? Or could this investment be something to add to your portfolio?
How Does a SPAC Work?
As stated earlier, a SPAC is a public company created to acquire a private company.
It works like this: a group of investors or a sponsor with a set of expertise raises money to acquire a non-listed company.
In short, a special purpose acquisition company sponsor and investor might have no idea what company they will be buying at the outset.
The money raised exists in escrow for a certain period of time, usually two years.
The money in that account is distributed to either complete the acquisition for the private company on the merger agreement or when that money is returned to investors after time expires.
Once investors approve, the new company will start to trade on a public exchange.
What Is a SPAC Warrant?
A special purpose acquisition company holds investor money in escrow, and then those funds buy the targeted company.
After the IPO, SPAC units often get split into warrants and common stock.
This gives investors extra incentive as the warrants can also be traded in the open market.
These warrants represent the bonus for investors who have put their money into a blind pool.
For example, as stated above, units will often contain ½ warrant, a ¼ warrant, or a full warrant.
The warrant type will depend on the sponsor or the track record of who is leading/promoting the SPAC.
The SPAC warrants will be redeemable at certain trading price thresholds.
The strike price for most warrants is $11.50 per whole warrant, with adjustments for splits and other factors.
The warrants can be exercised only if the SPAC completes a deal before the specified date.
This date usually occurs 30 days after the de-SPAC transaction.
The Lifecycle of a Special Purpose Acquisition Company
A special purpose acquisition company will go through the normal Initial Public Offering (IPO) registration process, which includes filing an S-1, communicating with SEC regulators, negotiating underwriting agreements along with the roadshow, pricing, and, finally, closing.
The IPO places funds in a trust account while the management team seeks a suitable takeover candidate.
The terms of the SPAC will vary from deal to deal, but management has a given time to find an acquisition and complete the deal (24-months is a standard timeframe).
Often, initial investors into SPAC’s will get units consisting of one share, plus a fraction (usually 1/3rd to 1/9th) of a warrant.
When the units split (usually 60 days after their IPO), investors get shares and warrants.
If the time expires, the capital returns to investors.
In many cases, special purpose acquisition companies will go public with a narrow or sector-specific focus in their search for an acquisition.
Following a successful acquisition, the SPAC will call a mandatory shareholder vote or tender offer.
If the shareholders vote in the negatory, they can get their money back (SPACs are usually priced at $10 per share, but this can vary).
Should the shareholders approve the deal, the combination will commence (called a “De-SPAC transaction“), and the target business will combine into the publicly traded company.
The Best SPACs to Buy
If you are sold on SPACs and want to check out some options to invest in, take a look at our top picks for the best SPACs to buy now.
MSD Acquisition Corp. (NASDAQ: MSDA)
The MSD Acquisition Corp. is hunting for companies in high-growth sectors with strong economics and a competitive advantage among similar ventures.
While not limiting itself to any particular industry, MSD is preferable to the technology and media space.
The SPAC has no operations of its own and is explicitly pursuing a merger with an established business.
MSD was formed in early 2021 and is located in New York City.
At IPO, it listed 57.5 million units of stock at a price of $10 per share.
With no candidates in sight at this time, these share prices continue to hover right near the $10 mark.
Investing in MSD Acquisition Corp. now could pay off in a big way once a merger is in the works.
Rocket Internet Growth Opportunities Corp. (NYSE: RKTA)
Rocket Internet looks to strategically partner with fledgling internet and technology enterprises to provide them with the tools they need to succeed.
The company has over 200 companies in its portfolio on six continents and is valued at over $30 billion.
In early spring of this year, Rocket Internet launched its own SPAC, Rocket Internet Growth Opportunities Corp.
In a similar vein to its parent company, Rocket Internet Growth Opportunities Corp. seeks to merge with an internet and technology venture from the ground up.
In doing so, both parties stand to benefit from the agreement.
Rocket can bring a lot to the table with a business model that’s been in place since 2007.
The SPAC just needs to find the right business to partner with moving forward.
Investing in Rocket Internet Growth Opportunities Corp. before a merger is announced could put investors in an excellent position for gains.
Horizon Acquisition II (NASDAQ: HZON)
Horizon Acquisition II is unsurprisingly the second SPAC from the Horizon Acquisition Corporation.
The corporation’s first SPAC merged with event ticket provider Vivid Seats in just October of last year.
Although Horizon Acquisition II is not limiting itself to any one industry, the SPAC hopes to pursue a business in entertainment and media just like its predecessor.
Horizon II was pursuing a merger with sports betting venture Sportradar, but talks fell through last summer.
The fallout did impact Horizon II’s stock slightly, but this could be an opportunity to pick up a SPAC stock for a little less than normal.
No merger is currently in the works for Horizon Acquisition II, but many speculate it’s not far off.
The parent company is already preparing for an IPO on its third SPAC in the entertainment sector and will want to merge Horizon Acquisition II before this happens.
Social Capital Hedosophia IV or VI (NYSE: IPOD or IPOF)
IPOD and IPOF are the fourth and sixth of Charmath Palihapitya’s growing series of SPACs and are currently trading at around $10 per share.
Given the company’s current value, this is a very affordable price and makes these some of the best SPACs to buy right now.
These are next in line with four previous closed deals.
Such deals include IPOC, which merged with Clover Health in early 2021, and IPOE, which recently merged with finance business SoFi.
Venture capitalist Palihapitiya has an excellent reputation and a natural eye for success.
He rose to notoriety by taking Virgin Galactic public with his first SPAC IPOA.
Anything Social Capital Hedosophia touches immediately generates hype among market investors.
IPOD and IPOF offer a relatively low-risk investment, especially if they follow the same trajectory as IPOB and IPOC.
This SPAC only just hinted at a merger with chat platform Discord, and this announcement is already causing a stir in share prices.
For reference, IPOB’s merger announcement with Opendoor saw the stock price jump from $10 a share to almost $25 a share in a single day.
With the rumor mill buzzing, this may be the ideal time to jump on board.
Best SPACs to Buy: List of SPACs that Announced a Merger
If you’re interested in investing in SPACs that just announced a merger, take a look at the entries that made out the shortlist.
Dune Acquisition Corp. (NASDAQ: DUNE)
Dune Acquisition Corp. is a SPAC formed in December of 2020.
The company was founded by Carter Glatt and is based out of Florida.
In October, the SPAC announced a proposed merger with TradeZero Holding Corp.
TradeZero is a commission-free stock trading platform that provides several market scanning tools.
This announcement has Dune Acquisition Corp.’s share prices trending upwards as investors look on in anticipation.
There’s no word on a closing date yet, but the process can take several months.
Dune stands out thanks to its redemption rights, where you can redeem your shares for a set price if the company fails to merge.
Its redemption price is almost identical to its current share price, which could add a nice safety net to your investment.
SPK Acquisition Corp (NASDAQ: SPK)
SPK Acquisition Corp is a Delaware-based SPAC that began its search for a merger in July of 2021.
While originally interested in the telecom space, SPK decided to throw its hat in the ring with Varian Biopharmaceuticals in February 2022.
Varian works to take the fight against cancer to the next level through new technology.
This tech will connect medical professionals through more intelligent data, solutions, and insights.
Tools can be used across the board as a part of cancer therapies, even extending to animals.
The company is also looking to small-molecule protein kinase inhibitors as an effective treatment in eliminating the disease altogether.
With a fresh merger announcement, no date has been announced to bring Varian public.
However, any announcement can boost SPK’s stock in the meantime.
Iron Spark I Inc. (NASDAQ: ISAA)
Iron Spark I has been on the prowl for a business dealing with commerce, technology, and culture.
The SPAC went live back in June 2021 with a $150 million initial public offering.
It is the first of its kind to pay shareholders a $0.05 quarterly dividend while working through the merger process.
In April 2022, Iron Spak announced a proposed merger agreement with Hypebeast Limited.
Hypebeast looks to combine contemporary culture with editorially-driven commerce and news.
The company works in several niches, including fashion, music, art, gaming, and technology.
Many big names have thrown their names into the ring as private investors, such as Jonah Hill, Tom Brady, and Tony Hawk.
Although there’s no time frame set for this merger, these investors may serve to expedite the process.
Breeze Holdings Acquisition Corp (NASDAQ: BREZ)
Breeze Holdings Acquisition Corp is a SPAC originally searching for a merger in the energy sector.
It went public in December 2020, entering in at just over $10 per share.
Instead, Breeze Holdings entered into a merger agreement with D-Orbit, a company that’s out of this world.
D-Orbit is an Italian venture specializing in space logistics and orbital transportation services.
Although not yet public, D-Orbit has already proven itself with successful launches since its inception in 2011.
Its latest mission traveled to space in January of this year.
The merger will help D-Orbit reach further into the heavens than ever before.
There’s been no announcement of a merger date, but Breeze share prices are already slowly increasing.
Any favorable news could cause share prices to jump considerably.
Pros of SPACs
One of the most important characteristics of a Special Purpose Acquisition Company is its flexibility.
Even sponsorships shares can be adjusted from 20% to 0%.
In short, everything is negotiable.
The negotiations on shares and warrants are open, especially as the termination date approaches.
These issues are all up for grabs because there are many SPACs with different amounts of capital.
And here lies another bright spot of the SPAC, access to primary capital.
Lastly, timing is another crucial factor.
A traditional IPO or a direct listing will take an average of 6–7 months to begin trading, while a SPAC will take around 2–3 months.
Cons of SPACs
The vetting of a public company is a prolonged process to ensure the deal is a good one.
Transparent business practices are desirable, but a SPAC is not.
It is a quick-moving public offering where the paperwork process has been simplified, and transparency is low.
In short, one of the benefits of the SPAC can also be what actually makes it risky.
Moreover, no SPAC is a sure thing; a recent study by Renaissance Capital found that 89 SPACs that had gone public since 2015 posted an average loss of 18.5%.
Traditional IPOs booked an average gain of 37.2% over that time.
It’s also worth noting that, in August 2021, a Securities and Exchange Commission (SEC) advisory panel released a draft proposal proposing that the regulator increase oversight of SPACs.
This may indicate that stricter disclosure requirements are on the way, which would be good for transparency.
Lastly, promoters can often get sweetheart deals when it comes to SPAC listings.
The big names in the industry can ask for a lot of stock.
Similarly, many of the investors in SPACs are just looking for quick cash, meaning they don’t plan to buy the company long-term.
Should You Invest in a SPAC?
The short answer is it depends.
Are you willing to commit trading capital to a stock where you do not clearly know what you are buying?
For many investors, the mystery of SPACs is what makes them attractive.
Remember that you can always request your money back when a SPAC finally merges.
For this reason, SPACs offer speculative investors huge potential upside with limited downside risk.
Where Can I Buy SPAC Stocks?
Although somewhat unique, SPAC stocks are listed on the same exchanges you’ll find any other stock.
Robinhood is a great platform to use to access these listings.
It is very user-friendly and easy to find your way to the tickers you’re looking for.
If you’re looking for something a little more in-depth, consider Webull.
This platform has more complex tools and algorithms for uncovering lesser-known stocks that could break out at any time.
Both platforms search only the major exchanges such as NASDAQ and the NYSE, where tickers tend to be less volatile.
All the SPACs we’ve looked at today are listed on one of these two exchanges.
Best SPACs To Buy: Final Thoughts
SPACs are undoubtedly the most popular “third door” on Wall Street right now, and, honestly, there are plenty of companies waiting in the wings.
CB Insights currently counts 474 unicorn companies worth over $1,535B.
Some of those names have already been on the tip of Wall Street’s tongue, like JUUL, DoorDash, SpaceX, and Airbnb, to name a few.
In short, SPAC Season is just beginning.
Best SPACs FAQ
Check out these answers to some of the most popular questions surrounding SPAC stocks.
Are SPACs Good Investments?
SPACs often depend on the success of the company they are merging with.
Like any other investment, research goes a long way toward identifying which SPACs are going to win.
There have been very successful SPACs such as DraftKings that are still doing well on the market.
Can SPACs Go Under $10?
SPACs can dance a bit above or below the initial IPO value of $10 without much concern.
However, SPACs can drop significantly below $10, raising a red flag for investors.
What Does SPAC Stand For?
SPAC is the acronym for special purpose acquisition company, also known as a blank check company.
What If a SPAC Does Not Merge?
If a SPAC isn’t able to firm up a merger in the time allotted, funds are liquidated and returned to shareholders.
What Are the Most Successful SPACs?
Many SPACs have completed mergers, and some have done better than others.
The biggest successes from SPACs are DraftKings and Opendoor.