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The SPAC is the Vegas wedding chapel of liquidity events; it seems like an urgently good idea at the time, but it doesn’t always turn out that way. - Byrne Hobart
One of the hottest topics in the world of raising capital these days is the SPAC - the Special Purpose Acquisition Company. It’s a type of shell corporation that is created for private companies going public. For those new to raising capital, all of the potential routes to take towards finally going public can be difficult to navigate. If you’re wondering what the difference is between a SPAC and other options for your company, then look no further.
Wait, What’s A SPAC?
Before we compare Special Purpose Acquisition Companies to other options on the market, it’s important that everyone is first on the same page and understands what a SPAC is. A SPAC is a shell company - it’s an entity that is created not for commercial operations, but rather strictly to raise capital for a traditional initial public offering or IPO. The capital raised is then used to acquire an already existing company. As a shell company, a SPAC doesn’t need to have assets other than cash when it goes public. In layman’s terms, it’s a company used to take a private company to the public market. Generally, to set up a shell company in the form of a SPAC an experienced management team or sponsor is required. Around 20% of the shares are held by the founding members while the remaining 80% are for public shareholders. Most of these companies are software-centric but recently many real estate companies are also turning to SPACs.
So why go through the extra steps? One major reason for this is that when you create a SPAC, you don’t need to go through the extensive disclosures that come from a traditional IPO process. It’s for this reason that you’ll often hear SPACs referred to as “blank check companies”. That’s not to say that there are no restrictions on SPACs. The raised funds that go into a SPAC can’t be used for anything other than acquisitions.
Why Are SPACs So Hot Right Now?
Since 2019, the gross proceeds from Special Purpose Acquisition Companies have exploded - there’s no other way to describe this growth. We’ve seen these deals worth billions lately. So what the heck is going on here?
When it comes to SPAC vs. IPO, the fact of the matter is that SPACs are a lot faster and more nimble than long-term traditional IPOs. The SPAC model is alluringly simple - unlike with a traditional IPO, you can start looking for the money right away, and decide where it’s going to go later. It allows companies to start public trading much faster.
SPAC investors are willing to hop aboard this wild ride because they’re assuming they’ll get something out of it - even if what they do get, ends up being a surprise! Worse comes to worst, they can simply redeem their shares. You just need to be careful that the share price doesn’t drop lower than when you purchased it.
What Are The Other Options?
If you’re not experienced in the capital raising game, you might not be aware of the other options on the table. Traditional IPOs and Direct Listings are the other methods for growing companies to get the capital they need to maintain their growth while going public.
The traditional IPO is a fairly straightforward and organic process, though it can involve a good deal of due diligence. When your company is private, you’re generally restricted to a small pool of investors, like venture capitalists. When you make your traditional IPO, you are opening up the sale of shares to the general public. This is generally considered the way to take your company to the “next level” - but you’ll also need to make sure that you are following a host of new SEC regulations.
Traditional IPOS use entities called “underwriters” to take on a portion of the risk - these underwriters act as intermediaries during the selling of the shares. However, this process can end up costing a significant amount of cash. Companies that have less money but still want to go public can perform what is known as a “direct listing:” Direct listing is essentially a faster and cheaper form of the traditional IPO - but one that comes with more risk.
IPO vs. SPAC vs. Direct Listing
So when it comes down to SPAC vs IPO vs Direct Listing - how do you tell the difference? What are the benefits and drawbacks of each? We’ve touched on some of the reasons for taking these various paths before, but here is a quick list:
- IPOs are the traditional method for going public and starting to collect capital. Traditional IPOS are a tried and true method that is reliable - but can often be a slow process. You need to put in the legwork convincing the public to pick up shares in your company. As well, you’ll need to make sure that your company is SEC-compliant before you go public.
- A direct listing ends up in the same place as a traditional IPO, but with more risk involved. You can skip past a lot of the underwriting process, but you need to accept the greater risk involved. If you’re a young and hungry company, however, you may not want to wait.
- SPAC’s are all about speed. In fact, with them, the capital will be raised even before a company has been selected to invest in. Not only is the money raised first, but using a SPAC lets you avoid some of the red tape associated with going public under SEC regulations. As a company owner, you will need to go out and find a SPAC to deal with - just instead of negotiating with the wider public, you’re trying to deal with a single entity.
What’s the Right Choice for Me?
There’s no real right answer for the question of SPAC vs IPO. Whether you go for a SPAC or a traditional IPO depends on personal preference.
However, the younger your company is, the more attractive a SPAC may be. This is because, for young companies, there may be many difficulties in navigating the traditional IPO structure. Partnering with a SPAC can be profitable - and more importantly, profitable in a short amount of time.
The speed of SPACs can be vital if you are a startup on the grow. In the world of startups, hype can be very difficult to maintain. By the time you finish a traditional IPO process, investor interest in your startup may have faded. With a SPAC, the money is already there - you just need to go find a SPAC that you can negotiate with.
However, you do have to be careful when it comes to these SPAC negotiations. If you aren’t careful, you could end up losing control of your company as the SPAC makes a large investment. The “money first, questions later” aspect of SPACs may also be attracting investors who don’t know what they are getting into or might not be the most reliable.
Need More Capital Advice?
We get it - one of the most difficult parts of being a startup is trying to navigate the capital-raising process. If your company is looking for more information on investor relations or methods of raising capital, then look no further. Contact us to schedule an advising session today.