SPACs vs IPOs: what are the differences?
It’s now easier than ever for private companies to go public thanks to the popularity of SPACs (special purpose acquisition companies). Discover the difference between a traditional IPO (initial public offering) and a SPAC.
What’s the difference between a SPAC and an IPO?
Special purpose acquisition company (SPAC) and initial public offering (IPO) are two different ways companies can go public. Start-up companies that want to be listed on a stock exchange generally require funding from external investors before they can go public.
The traditional way of going about this is via an IPO. However, this typically takes time and requires a lot of capital. Some companies have turned to assistance from SPACs to get over this hurdle.
Here’s what you need to know about the difference between a SPAC and an IPO:
What are SPACs?
SPAC is an acronym for ‘special purpose acquisitions company’. This term is used to describe a public shell company formed for the purpose of raising capital to buy a private company. Once the private company has merged with the SPAC (also called a sponsor), it will fast track the process of getting the company listed.
This has become a popular method for companies to go public. In 2020, a total of $75 billion was raised by SPACs, showing a 451% increase in the total value of deals from 2019 to 2020.
What are IPOs?
IPO stands for ’initial public offering’, the process by which private companies become publicly traded. The process of going public involves listing on a stock exchange and making a company’s shares available to the public.
Depending on the company’s profile, the process of marketing and drumming up investor support can take a long time in comparison to a SPAC listing.
Why do companies choose to go public via SPACs over traditional IPOs?
The decision to opt for a SPAC listing instead of the traditional IPO can depend on a variety of factors. Private companies often want to retain a larger portion of the company, and listing via SPAC would mean a loss of independence.
Here are some of the factors that influence companies to choose SPACs over traditional IPOs:
- The cost of going public via a traditional IPO is high compared to a SPAC-organised listing, as there are more steps involved
- SPAC listings are often much faster to process than the traditional IPO, also due to the above
- SPAC sponsors are formed by financial investors and professionals in the private equity or hedge fund industry. The private company often benefits from the expertise of these industry giants
- The valuation of a SPAC will be based on the company’s potential and will not receive the scrutiny it may be subjected to with a traditional IPO process
- Listing via SPAC could mean that there’s more money available to assist the growth of the company, because it requires far less money to go public than a traditional IPO
One of the most recent special purpose acquisitions in was the DraftKings listing, when the company merged with Diamond Eagle Acquisition in 2020. The SPAC raised $350 million and the resulting merger valued the company at $3.3 billion when it went public.
Advantages and disadvantages of listing via SPAC vs IPO
SPACs |
IPO |
Money is raised from venture capitalists, hedge funds and other corporate businesses, with the potential to get additional investment |
Company has to wait until it’s listed on the stock exchange and the shares are bought before they get a capital injection |
Less risk of valuation falling below expectations because it is decided before negotiations begin |
The share price of the company is based on when the listing happens and prevailing market conditions |
Quicker process of going public |
A longer process of getting listed due to regulation |
Lower cost of acquiring IPO, with only 2% SPAC pays for underwriting fees and combined company pays another 3.5% to the underwriter after the SPAC completes the merger |
Traditional IPO collectively cost around 7%, with payment for administrative, legal, auditing and underwriting fees by the IPO company |
Ability to negotiate terms of the deal to get preferential agreement |
There is little to no room for negotiations. Once the backers aren’t confident in the terms, the deal may be in jeopardy |
Better support structure and expertise from SPAC sponsors, made up of directors with a good track record |
The private company needs to outsource or recruit experienced professionals to perform the required roles after the listing |
SPAC vs IPO summed up
- SPACs and IPOs are two different ways that companies can use to go public. Each option has its own advantages and disadvantages
- Traditional IPOs is the lengthy process of a company becoming publicly listed on the stock exchange
- You can trade IPO and speculate on the company’s market cap on its first day, become an investor and sell shares once the company is publicly traded
- With us, you can also trade on certain IPOs before they even go public, a benefit that’s hard to come by
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