A NEW KIND OF INVESTMENT
A few days into January, I discovered special-purpose acquisition companies, or SPACs, and after doing my research, invested into Social Capital Hedosophia Holdings Corp. V (Ticker: $IPOE), a holding company created by VC firm Social Capital and its CEO Chamath Palihapitiya.
SPAC’s are a much more complex and controversial investment than regular stocks or funds. Below is a four step timeline of a typical SPAC:
STEP 1: A number of individual investors (typically billionaires) get together and pool money. With this money, they create a shell company and list it on the public markets
STEP 2: These billionaires look for a private company that they think will succeed in the future. When they find one, the two parties discuss terms and conditions of a deal to take the private company public. They eventually reach a deal.
STEP 3: The two parties then begin the registration process, which they have up to two years to complete. At the same time, the shares of the SPAC (mentioned in STEP 1) can be traded on the public markets. These shares are called ‘units’.
Warrants of this SPAC can also be bought/sold/traded. Warrants give people the right to buy more stock later at a fixed price. (Just like an option). Warrants can by denoted by a ‘W’, “WS”, or “+” at the end of the SPAC ticker. (ex: HYLN becomes HYLNWS on TD Ameritrade or HYLN+ on Fidelity)
STEP 4: On a day within the two year period (mentioned in STEP 3) the two parties choose to merge. That day, the SPAC takes on the the ticker symbol and name of the private (newly public!) company.
This whole process is called a reverse merger.
OUTCOME: Owners of SPAC units and warrants, are essentially able to grab “pre-public shares” of a company.
The private company that $IPOE is merging with is SoFi, a popular personal finance company aiming to be a one stop shop for its users. SoFi offers fair and transparent lending, credit cards, investing and banking, as well as numerous other financial products like investing. It even has its own ETF’s, something I personally love.
I definitely believe in SoFi going forward, and was happy to invest in the SPAC.
Like anything new and different, SPACs are controversial in the stock market. Established bankers like former Goldman Sachs CEO Lloyd Blankfein have criticized them. He said that “[with a SPAC], you’re taking a company public…where one of the elements of a [traditional IPO] is dropping out and that is the discipline of IPO diligence”. He has a point. SPACs only have a two year shelf life so the pressure to get a deal done in that time can lead to rushed research and transparency issues.
In that case, I believe, that the success of a SPAC can depend on the reputation of the sponsor. I have taken a strong personal liking to Chamath since I first discovered him on CNBC. I then saw much more of him in this Stanford GSB interview, this Andrew Yang podcast episode, his Twitter page, and most recently, his own podcast. I love his no nonsense opinions, desire to use capital to solve the world’s problems, and optimistic attitude about retail investing.
Most importantly of all, he has seen success with this before- he recently took Virgin Galactic public via SPAC, and its shares continue to climb from increased optimism for a bright future.
Hoping for a good result!