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Hedge fund legend Bill Ackman has some big news. After much speculation over the fate of Pershing Square Tontine Holdings(NYSE:PSTH), Ackman recently announced his plans to launch Pershing Square SPARC Holdings, a special purpose acquisition rights company. Consequently, shares of PSTH stock are on watch as investors mull over the new proposition.

So, what exactly is a SPARC?

A SPARC operates as a modified, opt-in version of a special purpose acquisition company (SPAC). Investors in PSTH stock who opt in would receive long-dated, transferrable special purpose acquisition rights (SPAR) warrants to acquire common stock in the new company. Essentially, SPAR warrants would give holders the opportunity to invest in the company’s future merger transaction. Pershing Square SPARC Holdings and the SPARs are not yet publicly tradable and still need approval from the U.S. Securities and Exchange Commission (SEC) and the New York Stock Exchange.

With that said, many are still confused about the implications of this on PSTH stock. Let’s take a deeper look at what investors need to know.

Bill Ackman’s SPARC: How Will It Affect PSTH Stock?

1. One thing to note is that this company is not a SPAC, and it is not raising capital from investors at this time. Instead, it is issuing warrants to holders of Class A PSTH stock, as well as PSTH warrant holders.
2. Like a SPAC, however, Bill Ackman’s new SPARC does intend to complete a merger with a private company to take it public. Once it has identified a target, it will issue a prospectus to the SPARC warrant holders. Those holders will then have the option to exercise their warrants to receive shares in the new company.
3. This is one of the main benefits of the SPARC, as it will not hold investors’ money while searching for a merger target.
4. Additionally, the SPARC will not have a time limit to identify a target and close its merger. Right now, most SPACs must complete this process within two years.
5. As InvestorPlacecontributor Mark Hake noted, Ackman’s SPARChas not yet set an exercise price for the warrants, although SPARs will have a minimum exercise price of $10. Instead, the company will set an exercise price once it identifies a target and how much public capital it wants to raise. For instance, its filing with the SEC notes it could choose to set the exercise price at $20. Hake argues this makes it difficult to value the SPARC as a security.
6. At the minimum $10 exercise price, the SPARC would raise proceeds of $2,444,444,440.
7. Because of this structure, Hake (and Ackman) recognize it may be hard for the SPARC to gain regulatory approval. The current plan is for the SPARC warrants to trade on the New York Stock Exchange.
8. However, if that listing is not approved, the SPARC warrants would trade on the over-the-counter markets.
9. So when and how will the SPARC issue warrants? According to the filing, it depends on what happens with the PSTH SPAC, which is still searching for a merger partner.
10. If PSTH has initiated its merger by the deadline, the SPARC will issue its warrants to outstanding PSTH stock holders. If it fails to initiate a merger by the deadline, PSTH will have to liquidate the money in its trust and return that to shareholders. Ackman’s SPARC would then issue one SPAR for each of the 200 million PSTH shares outstanding.
11. Ackman’s SPARC estimates that the SEC will declare its registration statement effective around the same time PSTH approaches its merger deadline. This will kick off the process of issuing SPARC warrants.