CFA Institute issued a detailed guide for what retail investors need to know about investing in SPACs.
The mounting numbers of SPACs already listed in public markets pose growing investor protection concerns, the CFA said in a news release. With more than 700 SPACs in various stages in the marketplace this year and dozens more SPAC IPOs in the pipeline each month, investors need to be aware that competition for assets to purchase remains fierce. Most of these SPACs will be competing to find a suitable merger target to complete an IBC.
The SPAC guide lays out for retail investors the investment scenarios of complicated SPAC structures and how to assess a SPAC investment both as a low-risk return trading vehicle and as a longer-term investment strategy.
In short, traders can attempt to buy the SPAC shares for below $10 and later redeem them for $10 to play the yield opportunity. Regarding a longer-term strategy, investors can redeem the shares, get the original investment back in full, and keep the free warrants as an upside investment on the new IBC. A potentially riskier approach is to purchase SPAC shares with the intention of taking new IBC shares for the longer-term investment prospect. Here the guide stresses the importance of understanding that successful venture capital investing of this type requires two things: a diversified portfolio of plausible business prospects (i.e., not celebrity sponsors or futuristic dreams) and a holding period of five to seven years. Read more.
