February 25, 2021
If you’re a beginner in the investing world, you might be wondering, what are SPAC units? In this SPAC units explained blog post, we will tell you everything you need to know about this type of trading, including what SPAC units are, which brokers to use, and my tips on how to get the best deals.
What are SPAC units?
A SPAC unit simply contains one common stock and a fraction of a warrant. The fraction could be ½, ⅓, or ¼, or a smaller fraction. You can find the SPAC’s unit information on the SPAC’s prospectus on the SEC.gov website.
I would recommend looking at the 424B4 form to get any final SPAC unit information – I am not an SEC expert, but form 424B4 seems to be the final version of the S1 filing.
Switchback 2 is a SPAC that we will use as a case study throughout this SPAC units explained article.
The Switchback 2 prospectus says that the unit consists of one Class A ordinary share and ⅕ of a redeemable warrant.
It also notes that “No fractional warrants will be issued upon separation of the units and only whole warrants will trade. Accordingly, unless you purchase at least five units, you will not be able to receive or trade a whole warrant.”
What does this mean?
You will not get a warrant if you purchase 1-4 units of this particular SPAC; so you should buy at least 5 units if you want any warrants. Furthermore, if you buy say, 19 units, you will only get 3 warrants, but if you purchase 20 you will get 4 warrants.
Bearing this in mind, it’s important that you purchase units that have this specification in multiples of whatever fraction the warrant is. In this example, it is multiples of 5, but if your SPAC has ¼ of a warrant it will be multiples of 4, if it has ⅓ of a warrant it will be multiples of 3, etcetera.
I suppose it wouldn’t be that big of a deal if you missed out on one warrant. But I like to maximize my profit potential, so I prefer to buy the units in the multiple that gets me the most warrants.
When do the units start trading?
One of the main benefits of purchasing SPAC units is the fact that you can buy them early. They become available for trading on the first day of the SPAC IPO.
Generally, common stock and warrants are not available for trading until 52 days after the SPAC IPO. You will also find this information in the prospectus.
This means that if you want to invest in a SPAC when it initially IPOs, you will typically need to buy a SPAC unit.
Where can I buy the units and how do I trade them?
SPAC units are purchasable from brokers, but not all brokers. Some of the most popular brokers, such as Robinhood and M1 Finance, do not sell SPAC units (at the time of writing).
Of the brokers who offer SPAC units, they each have different advantages and disadvantages. Two that I have personal experience with are Fidelity and TD Ameritrade. I generally use Fidelity, where possible, for reasons that I will explain below!
Once you have decided on your broker (the two above are my personal recommendations, but please do your own research to find brokers that will work for you), you need to identify SPAC units. You can do this by finding the ticker symbol.
Once you have located your SPAC units, you can trade them like any other stock. You can easily buy and sell them online. I personally prefer to use limit orders to ensure that I don’t get any price slippage.
Two notes of caution about finding SPAC units and trading online:
- The ticker symbol may look marginally different than the prospectus. For example, on Fidelity, Switchback 2 units are SWBKU, whereas on the prospectus, they are SWBK.U. As you can see, this is only a minor difference, but you may notice it while browsing. If you have any doubt, contact your broker.
- I’ve had a bit of trouble finding units in the desktop and mobile apps on TD Ameritrade. After some searching, I eventually found them on the Desktop SnapTicket and on the ThinkorSwim platform (desktop and mobile version). ThinkorSwim is a platform that is connected to TD Ameritrade and is, to the best of my knowledge, free for customers.
How do I separate a SPAC unit?
Separating SPAC units varies depending on your broker. This explanation is based on the two brokers that I have used for SPAC units; Fidelity and TD Ameritrade.
There doesn’t seem to be any way to split either of their SPAC units online. Therefore, for both brokers, I have had to call them up and separate the units over the phone. Once you are through to a broker, it should be an easy transaction.
One of the perks of using Fidelity for trading SPAC units is that there is no charge to separate the units. However, TD Ameritrade charges $38 as a reorganization fee. This is on the cheaper side when it comes to brokers – I’ve heard that some can charge over $100! Make sure that you are aware of potential reorganization costs before purchasing any SPAC units.
Fidelity is my broker of choice, mainly because it is free to split the units. They also process the split in approximately 3 days, which is very reasonable – some other brokers can take over a week. Lately, their phone lines have been busy during peak times, but I have found the best time to get someone on the line quickly is around 8:30am EST.
Once I have requested the split, the common stock and the warrants will appear in my account, and my units will disappear. It’s incredibly easy!
One important thing to bear in mind is that some SPACs automatically separate. Whether it does or not, and the full details about when it splits, will be in the prospectus. Although the split is automatic – you won’t have any control over it – your broker may still charge you. Therefore, if you are purchasing this SPAC units, I highly recommend sticking with Fidelity or another broker with no fee, or one that only charges a minimal amount.
Should I separate the units?
If your SPAC units don’t separate automatically, you can choose whether to split them or not. Here is what I generally do:
- When using my preferred brokers, I tend to split the SPAC units. Doing this gives me more flexibility – if I want to, I can sell the stock and keep the warrants, or vice versa.
- However, if I was to be charged a steep fee from my broker, then I might consider not separating them.
If you are a SPAC beginner, I would recommend sticking with a broker who doesn’t charge you to split and splitting your first SPAC units. Over time, you’ll be able to assess what the right decision is with each individual SPAC.
At the end of the day, the decision to separate the SPAC units is up to you.
What happens to the units after the business combination?
After the business combination, there will typically be a forced separation of the units in the common stock and the warrants, and the units will no longer be available for trading. Your broker may still charge a unit separation fee for this.
The information of when this will happen will be stated in the prospectus.
For Switchback 2, it says “the units will automatically separate into their component parts and will not be traded after completion of our initial business combination”.
Make sure that you find similar information for whatever SPAC you buy, so you can be sure of their terms and conditions.
Should I buy SPAC units after commons and warrants start trading?
One of the main perks of investing in SPAC units is because you can usually do so 52 days before the common stock and the warrants are available for trade, so you can get a headstart on most investors. However, once the common stock and warrants are available for trade, it is generally less hassle to buy them separately.
If you buy them separately, you won’t need to ring your broker and arrange the split, as well as potentially pay any reorganization fees.
You may be tempted to look for arbitrage opportunities. This is when the SPAC units are cheaper than their component common stock and warrants.
For example, you may find a 10 cent per unit arbitrage opportunity. If you bought 500 of these, you could save $50, which might be tempting.
However, there are some things that you should consider. It normally takes at least 3 days to separate the units (sometimes longer). In this time, the market will fluctuate – often to the extent that you could have bought the market stock and warrants for 10 cents cheaper.
However, this isn’t set in stone. You may find a great arbitrage deal that you think is profitable. It’s completely up to you and your individual situation to determine if it’s worth the risk.
Benefits of SPAC unit investing
One of the main benefits of SPAC unit investing is it is usually the only way you can invest in the SPAC in the first 52 days after the IPO.
Because SPAC units aren’t available on popular apps like Robinhood, this means that you might be able to get the SPACs cheaper via your SPAC broker before the stock is available for trade on other popular apps.
This means that if you can get the SPAC cheap enough, you might end up with a really good deal.
When investing in SPACs, aim for the $10 floor or lower. This refers to the $10 per share that most SPACs have in a trust.
If a SPAC unit has ½ of a warrant per unit, and you can pay $10.50 per unit, it is as if you have paid $10 for the common stock and 50 cents for one half of one warrant, or $1 per warrant. Moreover, if you can purchase the unit for $10, then it’s as if you have the warrant for free.
Therefore, you can generally save money as long as you buy the SPAC units at a cheap enough price.
Pitfalls of SPAC unit investing
As I’ve mentioned throughout this article, a SPAC unit’s reorganization fee can be very high, even if it is an automatic unit separation. This is why I generally opt for Fidelity when buying SPAC warrants – although you may be able to find other brokers who also offer free unit splits.
Furthermore, some brokers (even the ones that charge excessive fees) can take a week or longer to split the units. In this time, the market could have huge fluctuations. Again, Fidelity has always split my units quickly, making me more inclined to use them for future SPAC unit trading.
To make sure that you are getting the most for your money, try to get your SPAC units near the $10 floor or lower.
The Bottom Line
To conclude, SPAC units can be an excellent way to trade, especially if you want an opportunity to trade before the common stock and warrants are available on other popular trading apps. They can be a little complicated, so it’s essential to have a thorough idea of what the SPAC unit offers by reading its prospectus.
The biggest advice I can give is to find a decent broker who won’t charge you to separate the units. You could try Fidelity, or research into other brokers and find another.
Once you’re set up with a broker and are purchasing SPAC units, try to aim for the $10 floor or lower to get the best deal.
Hopefully, this SPAC units explained article has given you an idea of what goes into trading SPAC units, and how to make the most out of each trade!
So what do you think about SPAC units? Leave me a comment below. Thanks for watching.
Want to learn the principles that help me to consistently beat the market? Check out my free eBook, 5 Things I Wish I Knew Before Buying My First Stock.
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DISCLAIMER: I'm not a financial advisor. These are my opinions and provided "as-is". It is not an offer to buy or sell securities. Read the Terms and Conditions.
I have a position in Switchback II
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies whose stocks are discussed in this article/video.
Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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Very useful and insightful, thanks for the article. My question is why the SPAC managers issue units instead of just common shares? What benefit does it add to the SPAC setup? You touch on how investors can best utilize this setup but not so much on why it is that way in the first place. Thanks in advance!
Hi Richard. Great question. Many SPACs use units instead of just common shares to include the warrants as an incentive for investors. Some SPACs, such as KVSC, only include common shares. KVSC can do this because they have a well-known management team, so there’s no need for them to incentivize investors.
Thank you. This was very helpful.
You got it. Thanks for watching!
I’m new to this discussion. If you want to invest in a SPAC and see the ticker and the tickerU which one is best to buy and what are the implications? This is pre-IPO. In particular I’m thinking about GGPI vs GGPIU
GGPI is the common stock and GGPIU is the unit. A SPAC unit typically contains 1 common stock and a fraction of a warrant. GGPIU, according to its prospectus on page 17, contains 1 common stock and 1/5 of a warrant. Here’s a link to GGPI’s prospectus: https://www.sec.gov/Archives/edgar/data/1847127/000119312521092626/d68809d424b4.htm
One isn’t necessarily better or worse. It’s totally up to the investor to decide what’s better for them.
After splitting the units into shares and warrants, I noticed that the shares were going up, but my warrants were going down, why don’t they go up and down in tandem, together?
It depends on many factors, and I won’t pretend to know them all. But I’m guessing that the warrants aren’t exercisable yet. SPAC warrants typically don’t become exercisable until after the business combination. Even then, most SPAC warrants I’ve seen need to be at least 12 months old before they become exercisable. If they aren’t exercisable yet, I wouldn’t expect them to behave like the stock at all as they can’t even be exercised yet. If they are already exercisable, the second reason I can think of is if the stock price is below the exercise price. This means that… Read more »
Thank you, Donnie, for this update! Very helpful. I’m new to this space. So, forgive me if my question is a bit mundane. Can you offer any guidance on the minimum amount of SPAC units a person should consider purchasing for each one of interest i.e. from the perspective of best bang for buck and when looking at the potential of making a niece piece of money? I realize the investment in an of itself is a risk, but if purchasing 5 SPACs @ a total investment of $100 each, for example, won’t yield a nice return because it’s not… Read more »
Hi Linda, sorry for the late reply. Your seemingly mundane question is actually a very complicated one and best fit for a financial advisor. As you know, I’m not a financial advisor, and it would be illegal for me to give direct specific financial advice like the one you’re asking about. Everyone’s risk tolerance and return goals are different. I learned about my own risk tolerance and goals through years of personal investing experience. I’ve never worked with a financial advisor, but if I did, I’d probably seek out a fee-only financial advisor and also try to find one that… Read more »