Getting PIPE'd

So recently we've had some issues with former SPAC's completely diving off the face of the earth after the filing of a form 424b3. What exactly is this form, why is it causing the price of some former SPAC's to get cut in half, and most importantly how can we take advantage of these? Let's take a look:


SPIR was a former SPAC that made a run up towards $20 near the end of September. We know that SPAC's typically carry a NAV (net asset value) of $10/share so our assumption that a stock running up near $20 was a pretty safe bet to stay above $7.50/share by November 19th. So to play that hunch, we sold a bunch of November 19th 7.5 strike puts for about $0.45 apiece. After all, how good does that look with this chart:

About two weeks later, SPIR looked like this:

A huge downward move highlighted by some very large red candles on the afternoon of September 30th and the morning of October 1st. It all happened incredibly quickly and before we knew it, SPIR was below our breakeven price and we still had over a month to go until the November expiry. This begs the question: what exactly happened?


The answer is that after market close on September 30th, SPIR filed the dreaded Form 424b3, which unlocks PIPE shares to be sold. Here is a link to that document, which we will reference: https://www.sec.gov/Archives/edgar/data/0001816017/000119312521288082/d43883d424b3.htm


(as a side note, all SEC filings are public information and can be accessed when filed using the SEC Edgar search database)


In this 424b3 we see that there are 24.5 million shares that are part of the PIPE investment which were being unlocked.

So how big of a deal is this? It really depends on the outstanding shares for the company. If there were a billion shares then 24.5 million is a drop in the bucket and we wouldn't expect to see too big of an impact on the share price. However from the header in this document, we can see that there are about 62M outstanding shares. That means 33% of the outstanding shares (which previously couldn't be sold) are being unlocked and PIPE investors could now sell at any time.

That's a pretty big deal.


"But HT, this seems like it came out of nowhere. Was there a way that we could have known this was coming?"


The answer is yes. And it is found in the S-1 (registration statement) which was filed by SPIR on September 23rd and is currently the 3rd item you'll see on the SEC public filing site when looking at SPIR.

Let's take a look at the key parts of what's in this document. The second page has the info we really care about for purposes of this discussion.

A week prior to the PIPE lockup (and the big drop) this info was all laid out for us. We can see the 62M of shares, we can see the 24.5M of PIPE shares, and we can also see the warrant exercise price of 11.50 which could also potentially further dilute the shares but those warrants likely won't be exercised by holders if the stock goes below $11.50 so we weren't too worried about that as sellers of 7.5 strike puts.


So the info about what at the time seemed like a bit of a mystery event was in front of our face the entire time. We definitely dropped the ball a bit by just taking the premium we saw and not taking this kind of deeper dive on the stock, but we're big believers in not making the same mistake twice so we'll learn and move on.


But now for the good part. How can we use this info going forward?


We currently hold a position in RKLB, which is a former SPAC and has not had their PIPE lockup yet. We similarly sold 7.5 strike puts on the stock because the premiums looked great. Let's run through the same process and see what the filings look like.


Funny enough, the 424b3 was filed TODAY for RKLB so we get to watch this one play out in real time. Here is what the form looked like:

There are 46.7M PIPE shares compared to 417M shares overall. That's 11.2% of the float as compared to SPIRE's 33% of the float. So while I still expect there to be a decent bit of a sell-off and we may see $11-12 soon, I don't expect that it will be anywhere near as bad as SPIR and I expect the 7.5p should be safe. They still carry a decent amount of premium because of this event so it'll be interesting to see how the price of the option reacts if we don't see a big drop.


The one stock I used to compare RKLB to is SOFI, which is also a former SPAC and trades in a similar range. Our RKLB Jan 2022 7.5p are trading for about $0.62. The SOFI Jan 2022 7.5p are trading for less than ten cents. SOFI filed their initial 424b3 back in May, and it involved an unlock of 27.5M PIPE shares out of a total $765M shares (3.6%). Obviously a far smaller percentage than RKLB but let's take a look at the SOFI price action after the 424b3 was filed on May 7th of this year:

The stock actually increased in price over the next month and a half. Why is this? For stronger stocks, many potential institutional investors sit on the sidelines and wait until after the PIPE unlock to load up on long term positions. It's not a huge secret amongst those who are in the know that this type of thing is happening and they wait for the inevitable sale to start loading up. We've seen a decent pattern of buying post-lockup expiry at around 10:30 the following morning. Here is what VLTA's chart looked like after the lockup expiry:

You can easily pick out the big red candles from the lockup expiry and then see a really nice rebound after 10:30am the following morning. Now that rebound hasn't necessarily been sustained thus far, but selling OTM puts the morning of the big dip would have proved very profitable. Here is what the October 15th 7.5p looked like during this timeframe:

You could have sold at 10:30am for $0.60 and then gotten out by end of day for $0.30, or the next day for $0.20. Really nice turnaround time on a volatility spike.


And if we keep our eyes peeled for these potential PIPE unlocks (VLTA was 30M PIPE shares out of a total of 90M!!) then we could even purchase some puts on the front end, despite how much I hate option buying. Quite frankly, a lot of people just don't know enough about this type of thing and the structure of SPAC deals. A few weeks ago, we didn't either. But hopefully if you've made it this far and read the whole thing you now have a better understanding and can start to take advantage of these big unlocks when they arise.


We'll be on the lookout out for any S-1's filed here in the near future.


Also it's late and I'm going to sleep so if you find any typos in here I'm blaming that.


If you want more analysis like this and want to be part of the discussion as we come up with trade ideas surrounding situations like this, sign up for HT Premium and join our premium chatroom which includes all of our trade alerts.