If you are, or are considering, investing in special purpose acquisition companies (SPACs), be aware that warrant redemptions warrant your attention.
A warrant is a contract that gives the holder the right to purchase from the issuer a certain number of additional shares of common stock in the future at a certain price, often a premium to the stock price at the time the warrant is issued. Retail investor exposure to warrants has increased substantially as a result of retail investors' interest in the Initial Public Offerings (IPOs) of many SPACs.
When an investor invests in a SPAC, they typically purchase "units" that consist of shares and warrants—and, in some cases, the investor may receive a fraction of a warrant. The terms of warrants vary greatly across different SPACs, so investors should understand the terms of the specific warrants in which they are considering investing as well as the risks associated with these speculative securities.
Importantly, in most cases, an investor cannot trade or exercise the fractional warrants typically issued as part of a SPAC unit. Rather, the investor must accumulate a whole number of warrants in order to trade the warrant or exercise the warrant, usually at a price of $11.50. For example, if a SPAC unit consists of one share of common stock and one-third of a warrant, an investor would need to purchase three units in order to own a whole warrant. Whole warrants may trade on a stock exchange or in the over-the-counter market with their own symbol.
If you invest in SPACS, be sure you understand how the redemption process works—that is, the process through which the issuer announces its intent to redeem, and subsequently purchases, the outstanding warrants investors choose to exercise. Here are five questions to guide you:
1. Have I researched the terms that govern redemption of my warrants so I can better monitor for redemption announcements?
Investors who purchase warrants—whether through a SPAC or not—should understand the terms that govern the warrants. These are disclosed in the prospectus, which you should be able to find in the SEC's EDGAR database. Pay special attention to warrant redemption announcements. The warrant is a potential source of significant value to the investor, and the warrant could expire nearly worthless (or, in other words, have a value of $0.01) if the investor does not exercise the warrants before the redemption deadline.
An example of the relevant portion of a recent warrant redemption notice reads as follows (emphasis added):
2. How long do I have to exercise my warrants once a redemption is announced?
Not long. Typically investors have approximately 30 to 45 calendar days from the announcement of a warrant redemption to exercise their warrants.
3. Can I rely on my brokerage firm to inform me about redemptions?
Not necessarily. Some, but not all, brokerage firms inform customers of upcoming warrant redemptions. Therefore, investors should actively look for information about redemption announcements for warrants they hold.
4. How do I monitor for redemptions?
You can monitor for warrant redemption announcements in a variety of ways, including those described further below. Investors should also bear in mind that, after a SPAC completes its initial business combination, the ticker symbols for the combined entity's (or issuer's) stocks and warrants typically change, so investors holding warrants that are exercisable should keep these new symbols in mind.
Investors may consider the following sources for information about warrant redemptions:
- Your Brokerage Firm—Ask your financial professional to confirm whether you will be notified of upcoming warrant redemptions and who is responsible, if anyone, to notify you. Some brokerage firms will contact their customers using their firm portal, email or mail, but some firms do not provide such notifications. If your firm does not provide these notifications, ask your financial professional, and their supervisor, if necessary, to do so or request assistance with obtaining these notifications from another source.
- Issuers and Acquirees—Monitor the issuer's and the acquiree's websites for press releases or notices announcing redemptions. In some cases, it may be possible to sign up to receive announcements or to follow the issuer or acquiree on social media. Remember, since the timeframe to exercise warrants is limited, you should check for redemption information frequently.
- EDGAR—Check the U.S. Securities and Exchange Commission's (SEC) EDGAR database to review the issuer's prospectus for the terms of the warrants and 8-Ks for redemption announcements.
- FINRA—If the warrants are not listed on a stock exchange and FINRA has assigned a symbol for them, you may review and monitor the "Dividends/Distributions/Splits" section of FINRA's Over-the-Counter Equities site for updates, which often includes warrant redemption notices, for the relevant SPAC. If you have questions about using the site, reach out to FINRA Market Operations via telephone at (866) 776-0800.
- Financial News and Social Media—Monitor the financial press and social media for information about or from the issuer regarding warrant redemptions.
5. What else should I consider before purchasing warrants?
Investors who are considering purchasing warrants should read any prospectus and related disclosures to inform themselves about, among other things, the specific terms and conditions of those warrants:
- What are the terms that govern the warrants, including any announcement the issuers will make on to announce redemption of the warrants?
- If trading in the secondary market has commenced, how many shares do you have the right to purchase for each warrant (including fractional warrants, if relevant) and what is the price of the warrant?
- Have the shares issuable from the warrants been registered?
- What is the "exercisable period", or the period during which investors can exercise their right to purchase common stock shares?
- When will the warrants will expire?
- What are the circumstances under which the warrant may be redeemed?
- SEC Investor Bulletin What You Need to Know About SPACs (May 25, 2021)
- FINRA Regulatory Notice 08-54: Guidance on Special Purpose Acquisition Companies (Oct. 2008)