Do redeeming shareholders in a SPAC get a free lunch?
Consider this situation:
A SPAC investor receives 1 warrant and a one unit of common stock in exchange for a $10 investment. The SPAC investor later decides to exercise his redemption option on the unit of common stock, recouping his original $10 investment. However, he gets to keep the 1 warrant. He later sells the warrant on the open market for $1, achieving a riskless 10% return.
Based on what I've read about SPACs, this appears to a realistic scenario. If this is possible, why doesn't everyone redeem their SPAC shares and sell their warrant for a profit? It seems to be easy money.
I'm sure I'm overlooking something, but I'm not sure exactly what. Would appreciate someone pointing out why I'm wrong.
I think this is fairly common among the “spac mafia”. I believe there are HFs who were / are big in this space where they basically put up the money to help launch a SPAC. Their cash is held in a trust account by the SPAC. They sell the warrant and then redeem their money once they can. Not sure if this arb still exists as much today though. I think I saw an interview with a fir tree partner who said that years ago this was basically just a play on doing diligence on the spac sponsor and making sure they were not a criminal who would steal the money. Today idk how much of this trade works out on an IRR basis
A quia vero soluta magnam voluptatum dolorem ad. Ex est numquam praesentium praesentium. Temporibus ratione et maiores rem et odio quia.
Ipsum quidem rerum blanditiis sit. Animi quia ea et fuga. Facere hic eum aut natus autem id.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...