SPAC Redemption Meaning
SPAC redemption is the process of redeeming the shares that were once bought either from SPAC IPO or from the stock market. It is a very common process and is performed when the SPAC company is closer to the merger.
SPAC redemption is important for every SPAC stockholder. Shareholders invest in the SPAC believing that the SPAC company will undergo business combination with a growing private company. But that is not always the case. In this article, we will walk you through what SPAC redemption is and how SPAC redemption works.
What are SPACs?
SPACs (Special Purpose Acquisition Company) are shell companies whose main goal is to combine with a private company. SPAC company is formed by big business tycoons which makes them attractive to investors. Once SPAC registration is validated by SEC (Security and Exchange Commission), a SPAC IPO is opened to the public. From the capital generated from the SPAC IPO, it will acquire a private company that wants to go public. That is why SPACs are also called alternative routes for private companies to go public.
A SPAC will have a 2 years time period to find a company and acquire it. If they cannot find one, they must return the capital to the investors. This is the reason why investors feel more secure in their investments. Also, private companies are attracted to SPACs as they are faster and cheaper for them to go public.
What is De-SPAC?
De-SPAC is the process in which both SPAC and a private company will undergo a business combination. Once the SPAC has found its target, both companies will agree on some conditions. After that, an announcement is made about the definitive agreement so that every shareholder is aware of the merger. The business combination takes time as both the companies need to audit their financing and capital. Along with that, SPAC will need to have enough proxy votes to undergo a merger. If the SPAC is unable to get more proxy votes toward the business combination than against it, then the merger will be canceled.
The definitive agreement is the document in which there will be agreed-upon deals with the private company. Deals like initial investment, PIPE deals, compensations, etc. are made and published. Based on those deals, and the history of that private company, the shareholders will either agree or disagree.
How does SPAC Redemption work?
The SPAC redemption is the facility provided by the SPAC company through which the shareholders can redeem their shares. This is basically performed if the shareholders do not like the deal with the private company. During the de-SPAC transaction, shareholder approvals are required to complete the merger successfully. Shareholders can vote in agreement or disagreement with the deal. The number of votes that a shareholder will vote is equal to the share they have invested in.
In most cases, the founders of the company will have 20-30% of the stocks. This percentage of the votes is already in favor of the proxy statement. As a result, it is almost certain that the SPAC will undergo a business combination. But what about the shareholders that voted against the proxy statement? Well, this is where SPAC redemption comes into play.
Before the merger is completed, there will be a redemption period. In this redemption period, shareholders can apply for the redemption of their shares. The company will be responsible to give back the capital based on the Net Asset Value of the stocks. That is $10 at which SPAC IPO opened plus some interest. The company will purchase the shares back with the shareholders at this price.
SPAC Warrant Redemption
SPAC warrants are the options that give the investors the right but not the obligation to purchase a share at a set price. The set price is usually $11.50. SPAC warrant redemption is only performed after the completion of the business combination. Usually, the SPAC warrants can last as long as 5 years but the company can force to redeem the shares in special cases. If the stock price exceeds $18.0 per share for more than 20 trading days, then the company will send a notice to redeem its warrants. If the warrant holders do not redeem before the SPAC redemption deadline, all the warrants will have no value.
SPAC Redemption Rate in 2022
Due to awful market conditions and oversaturation, the SPAC redemption rate in 2022 increased significantly. Rising inflation, interest rate increase, and the threat of a recession have made all the stocks go down. As a result, more and more investors are withdrawing their money from the SPACs even before the merger announcement. Also, private companies are also concerned about going public via SPACs. This wasn’t the case in 2021, as the average SPAC redemption rate was around 50%, which was 20% higher than in 2020. In the first 2 months of 2022, the average SPAC redemption rate reached 80%.
A recent successful business combination between GGPI (Gores Guggenheim) and Polestar only showed a redemption rate below 25%. This shows that there is still potential in the SPAC market once all this oversaturation and inflation ends. To be updated with every SPAC news, subscribe to SPACrun.