Trading on a Stock Exchange: Traditional IPO vs. SPAC IPO
For many company founders, nothing says “I’ve made it” like being publicly traded on a U.S. stock exchange. After the dedication and hard work, a listing on a stock exchange puts company leaders’ efforts on display and entices shareholders who want to be a part of the next big thing. There is an air of legitimacy to being publicly traded and the possibility of making millions overnight.
How does a company get there?
In a traditional IPO (initial public offering), an existing company decides it wants to go public, i.e., raise money from public investors. The company goes on a roadshow to advertise its intent to go public. Underwriters conduct a lengthy due diligence process to determine a fair price for the shares. The company files paperwork with the U.S. Securities and Exchange Commission (SEC) and sets up the business and administrative aspects required for the IPO, such as forming a board of directors and making required financial filings. The company sets a date for the IPO, offers shares to the public to infuse the company with capital, and begins trading on an exchange.
A SPAC (special purpose acquisition company) is a shell company that has no commercial operations and is formed for the sole purpose of acquiring or merging with a private company. The SPAC will have a management team, bank account, and some start-up funding. Because the SPAC has very little in the way of assets or operations, there is a brief disclosure process for a SPAC IPO. A SPAC has two years after creation to acquire a company. The SPAC will take on the function, operations, business model, and usually the identity of the company it acquires. If the SPAC does not acquire a company within two years, it is liquidated. If the SPAC is liquidated, investors receive their money back with interest.
Differences between Traditional IPOs and SPACs
Timing: A SPAC merger usually occurs in three to six months, while a traditional IPO takes twelve to eighteen months.
Costs of Marketing: Because most SPAC mergers do not require gaining the interest of investors in public exchanges with an extensive roadshow, the costs of SPAC mergers tend to be less than traditional IPOs.
Price Discovery: An IPO’s price depends on market conditions at the time of listing, whereas you negotiate the pricing with the SPAC before the transaction closes, which can be more advantageous in a volatile market.
Compensation: SPAC sponsors receive 20% of equity in the combined company and warrants to purchase more shares to compensate them for the risk they take in putting up their at-risk capital to form and operate the SPAC between the time of its IPO and the time it acquires its target company. While a great value to the sponsors, this dilutes the public shareholders’ ownership of the SPAC. Further dilution can occur in a SPAC if it requires additional funding through a PIPE (private investment in public equity).
Regulation and Level of Scrutiny: Traditional IPOs have stable regulations designed to protect everyday investors. The SPAC process does not require the rigorous due diligence of a traditional IPO, which some see as a major benefit to a SPAC merger. However, this lack of due diligence can lead to potential restatements, incorrectly valued business, and lack of disclosures important for shareholders when considering whether to approve the merger. While the SEC has announced new accounting mandates for SPACs, it is unclear how far the SEC regulations will go.
If you have recently bought shares in a company through a traditional IPO or SPAC merger, and have questions about the value of the shares or management of the company, Robbins LLP can help. Contact us to learn about your rights and remedies in relation to a loss in the value of your investment.