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
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