Digital World Acquisitions Corp. (NASDAQ: DWAC) or DWAC was up over 1,200% after two days of trading on 22 October. The spike came on news that the special purpose acquisition fund (SPAC) would be acquiring the social media platform, “Truth Social”, founded by former President of the United States, Donald Trump.
What’s a SPAC?
It stands for special purpose acquisition fund — you can check out a full breakdown here. A SPAC is an alternative method for companies to go to the public markets, also known as a ‘reverse merger’. They raise capital through a fund, usually backed by a seasoned investor with specialized expertise, or a sponsor works with the SPAC to find a suitable deal for acquisition. Due to the looser regulation and very little pressure on forward-looking statements for investors, SPACs are often a popular route for companies that are yet to produce revenue and/or profits. It can also be a far quicker way for companies to access investor capital as they don’t have to jump through the same regulatory hoops as they would have to for an IPO.
So what’s the word?
Well, one week on, we have seen a significant rise and fall in DWAC. The high of $175.00 per share was reached on Friday, but it has shed over 50% since then, now sitting at $83.86 per share. There is little to no information being published about the social media app, other than a limited launch in November 2021, and a full launch sometime in 2022. Time estimates that 42% of shares will be distributed to SPAC shareholders once the deal is complete. Currently, with a SPAC market cap over $3.5 billion, that would value the company at over $8 billion, and this is for a company we know nothing about.
So basically, its price action is driven by speculation. Reddit’s most elite investing community, WallStreetBets, has also taken a liking to the stock, making it the most popular ticker in the community in recent days.
Should you invest in SPACS?
Well, the risk/reward is certainly there. Some DWAC investors could be up 700% right now, and others could be down 50%. However, the sheer lack of information in this case makes it an impossible investment for me. If it’s within your risk tolerance, there can be a small number of SPACs that can make good long-term investments. However, some potential risks with SPACS are overly optimistic future projections, lack the resources, and overall sketchy business plans. It’s important to find the best of the bunch in these circumstances.
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Financial Writer at MyWallSt
David's favorite stock is Google. He's a daily user of its YouTube platform, where you can learn or find something brand new at the touch of a button. He believes the company will continue to grow for many years to come.