What Happens to a Pre-Merger SPAC Investment?

Typically, when a private company wants to become publicly traded, it undergoes an initial public offering (IPO). But an alternative method involves sponsors establishing a shell company, known as a special purpose acquisition company (SPAC), with no underlying business activities but with the sole purpose of acquiring an existing company.

On the surface, investing in a SPAC may sound risky. But investing in a SPAC with no intention of staying invested through the acquisition period is known as a pre-merger SPAC and can actually be a safer asset class to park cash. The RiverNorth Enhanced Pre-merger SPAC ETF (SPCZ) is an actively managed fund that invests exclusively in pre-merger SPACs, leveraging potential optionality to the upside while attempting to control risk.

The pre-merger stage has low risk, similar to a fixed-income investment, because all SPAC investment funds are held in a trust account that is generally invested in U.S. Treasury bills or U.S. Government Money Market funds. U.S. Treasury bills1 can be safe investments because they are backed by the U.S. government. The investor purchases a T-bill at a discounted price, then nets interest in the form of the difference between their purchase price and the face value at the end of the bill’s lifespan some months or years later.

When an investor invests in a SPAC at the time of the IPO, they are typically given a combination of stocks and warrants. The stock performs like a regular stock and is usually purchased for $10, which accrues interest in the trust account. A warrant, however, is where the true upside potential lies in a pre-merger SPAC investment. Warrants are usually offered at the time of IPO to incentivize early investment.

A SPAC warrant2 gives the holder the option to purchase more stocks prior to the merger at a predetermined price, typically $11.50 per share. For example, an investor might purchase 1,000 SPAC units for $10,000 ($10/unit) and each unit might contain one stock and one warrant*. A SPAC’s stock price typically increases after the announcement of an acquisition. So if the value of the stock increases to, say, $20/share, the investor could purchase 100 stocks with their warrants at the predetermined price of $11.50 per share, then immediately sell them on the market for $20/share and pocket the difference ($8,500 in this case).

If the stock value doesn’t increase, therefore rendering the warrants worthless, the investor still gains interest from the trust account’s T-bills when the stocks are redeemed prior to the acquisition. When investing in an actively managed pre-merger SPAC fund like SPCZ, the investor therefore can benefit from low downside risk with significant upside potential if the stock price rises.

For more information on pre-merger SPAC investment strategies, consult our FAQ guide.

*Warrant terms vary and are often given as partial warrants per unit. Warrants can only be sold in the whole, not in parts. 


The RiverNorth Enhanced Pre-Merger SPAC ETF is also subject to the following risks: New Fund Risk – The Fund is a recently organized investment company with no operating history. As a result, prospective investors have no track record or history on which to base their investment decision. Leverage Risk – The use of leverage is speculative could magnify the Fund’s gains or losses and increase risk. This is the speculative factor known as leverage. Borrowing also may cause the Fund to liquidate positions under adverse market conditions to satisfy its repayment obligations. Borrowing increases the risk of loss and may increase the volatility of the Fund. Pre-Combination (Pre-Merger) SPAC Risk – The Fund invests in equity securities and warrants of SPACs. Pre-combination SPACs have no operating history or ongoing business other than seeking Combinations, and the value of their securities is particularly dependent on the ability of the entity’s management to identify and complete a profitable Combination. There is no guarantee that the SPACs in which the Fund invests will complete a Combination or that any Combination that is completed will be profitable. Unless and until a Combination is completed, a SPAC generally invests its assets in U.S. government securities, money market securities, and cash. Public stockholders of SPACs may not be afforded a meaningful opportunity to vote on a proposed initial Combination because certain stockholders, including stockholders affiliated with the management of the SPAC, may have sufficient voting power, and a financial incentive, to approve such a transaction without support from public stockholders. Some SPACs may pursue Combinations only within certain industries or regions, which may increase the volatility of their prices. In addition, the Fund may invest in vehicles formed by SPAC sponsors to hold founder shares, which may be subject to forfeiture or expire worthless and which generally have more limited liquidity than SPAC shares issued in an IPO. In addition, the Fund may invest in vehicles formed by SPAC sponsors to hold founder shares, which may be subject to forfeiture or expire worthless and which generally have more limited liquidity than SPAC shares issued in an IPO. Foreign Securities Risk – Foreign SPACs Investments in SPACs domiciled or listed outside of the U.S. may involve risks not generally associated with investments in the securities of U.S. SPACs, such as risks relating to political, social, and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices. Further, tax treatment may differ from U.S. SPACs and securities may be subject to foreign withholding taxes. Small-Cap Risk – SPACs will have a more limited pool of companies with which they can pursue a business combination relative to larger capitalization companies. That may make it more difficult for a small capitalization SPAC to consummate a business combination.