The Difference Between Pre-Merger and Post-Merger SPACs

A Special Purpose Acquisition Company (SPAC) is one that has no commercial operation, but is instead formed for the sole purpose of raising money through an initial public offering (IPO) to merge with or acquire another company, bringing it into the public market. The number of SPACs has increased exponentially over the past three years, with 613 SPAC IPOs in 2021 compared to just 59 SPACs in 2019 (1). A SPAC’s target acquisition is not stated when it IPOs, but the SPAC typically has two years to complete an acquisition or else be forced to return all funds to their investors. Anyone can invest in a SPAC and they are often called “blank check companies” because they are invested in without people knowing much of anything about them or their acquisition intentions.

SPACs can be thought of in two stages. First is the pre-merger stage during which a SPAC raises money through an IPO before acquiring another company. From an investment standpoint, the pre-merger stage is often thought of as similar to a fixed-income investment because all investment funds in the SPAC are held in a trust with interest or dividends paid to investors until either the SPAC acquires a company or liquidates in the event it is unable to find a deal within the required two-year post-IPO timeframe – which is similar to the nature of a fixed income investment. If it liquidates, all funds are returned to investors. 

The second stage of a SPAC is the post-merger stage, characterized by the SPAC successfully acquiring or merging with a company. The original investors are offered the opportunity to have full equity in the acquired company during the post-merger stage, which often involves a fair amount of speculation regarding the potential success of the deal. A post-merger SPAC is therefore riskier than a pre-merger SPAC. As with most risky investments, the majority of post-merger SPAC investments don’t pay off: up to 70% of SPACs that IPO’d in 2021 were trading below their offer price by the third quarter(1).

Even if a pre-merger investor has no intention of moving forward with the post-merger process, they can still cash in their original investment and sell their shares on the open market if the deal is viewed favorably. Pre-merger SPACs tend to have more limited downside risk because investors have the right to fully redeem their investment. Plus, pre-merger SPACs have the added upside potential if the post-merger equity option turns out to be an appealing opportunity.

TrueMark’s newest ETF is an actively managed pre-merger SPAC ETF (SPCZ) that seeks to preserve capital and provide incremental total return as part of an alternatives allocation in a portfolio in an effort to capture alpha with low correlation to traditional asset classes. We believe this new offering is a rare opportunity for risk-averse investors to invest in a trust account-backed security with minimal interest rate and credit risk that permits full redemption of funds within a short time frame or an alternative opportunity to participate in equity upside should the deal look favorable. Given market volatility and rising rates, the TrueShares SPAC ETF can be used as part of defensive portfolio allocations.

Learn more about RiverNorth Enhanced Pre-Merger SPAC ETF (SPCZ) at