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What are warrants? A warrant is similar to an option, except it is traded on the stock exchange. Warrants provide the holder the right (but not the responsibility) to buy one share of the underlying corporation at a set price per warrant, which is usually $11.50. After a merger is completed, almost all SPAC Warrants have a five-year duration, but they are a binary wager on a five-year warrant on a hypothetical future firm that expires and becomes worthless in the case that the SPAC wasn't able to complete a merger. Only if the SPAC completes a business combination deal before the designated date do warrants become exercisable. Warrants can only be exercised one year after the SPAC's IPO or 30 days following the merger, according to several SPACs. Many SPACs additionally provide that the corporation can redeem the shares if the price of the underlying common share trades over a specified threshold, generally $18, for 20 out of 30 trading days. This can be done with cash (the $11.50) or without cash. You would just trade your warrant for a fraction of a share if you were working on a cashless basis.
Why go public through a SPAC instead of an IPO? The short answer is to save money and time. Going public through an initial public offering (IPO) is a time-consuming procedure that entails complicated regulatory filings and months of talks with underwriters and regulators. This can hinder a company's ambitions to go public, particularly during times of increased uncertainty, when the danger of investors rejecting its IPO is significantly higher. On the other hand, if a firm merges or is bought by a special purpose acquisition company (SPAC), which is an organization that exists only for the purpose of completing such an acquisition, it can become public within months. In comparison to another buyer, such as a private equity firm, which may drive a hard bargain, the owners of a target company may be able to better negotiate an advantageous price from a SPAC as it has limited time to make an acquisition.
What is a SPAC? A special purpose acquisition company (SPAC), also known as a blank check company, is a business formed only for the purpose of accessing capital through an initial public offering (IPO) in order to buy another company. SPACs are commonly referred to as "blank check companies" because they go public without having any real commercial activity.
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