SPAC vs. IPO: Breaking Down the Differences

SPAC vs. Traditional IPO

As of December 2020, more than 200 companies had used a SPAC (special purpose acquisition company), to go public, rather than the more traditional IPO (initial public offering) method. SPACs continue to dominate business headlines, with SPAC transactions accounting for some $170 billion in equity thus far in 2021.

Read on to learn the difference between IPO and SPAC, including why so many companies are choosing SPACs rather than IPOs to go public in 2021.

How an IPO Works

While every IPO is unique, the process typically takes this shape:

• An existing company decides it wants to go public
• The company advertises this by making its case to investors, in what's known as a roadshow
• The company hires underwriters to review its assets and help determine the share price to offer
• Behind the scenes, the company provides the underwriters with records, financial statements and other analyses so the underwriters can set a fair price per share
• The underwriters complete due diligence — a lengthy process
• The company completes necessary paperwork related to the IPO and files with the SEC in the meantime
• On the back end, companies take necessary steps related to the business and administration side of the IPO, such as forming a board of directors and making required financial filings
• A date is set for the IPO
• Shares are offered to the public and the stock price hopefully increases
• The company is now listed publicly

How a SPAC Works

In a nutshell, SPACs take the opposite approach to IPOs. A shell company is formed and taken public; this is the SPAC. The SPAC's purpose is to look for a private company to buy.

Whereas companies looking to go public via IPO must hold elaborate roadshows where they prove their worth to investors before going public, SPACs operate differently. Rather than being convinced to support an IPO, these individuals freely give their money upfront. SPACs tend to attract investors that want the cachet and profits that come with going public, with less upfront risk.

The SPAC must follow the same rules as other public companies regarding governance, SEC filings and the like. Thus, the SPAC will have its board of directors, file financial reports and comply with restriction on stock trading. The main difference at this point is purpose: The SPAC only exists to purchase a private company and take it public, whereas private companies exist to fulfill their market-driven purpose.

After going public, the SPAC then looks for suitable targets to acquire. This process can take up to two years. It depends on how selective the investors are and what requirements they have. When a SPAC finds its match and a deal is brokered, the SPAC "takes over" the privately held company. The SPAC is then dissolved because it had fulfilled its purpose.

Given the number of moving parts in an IPO deal, it generally takes anywhere from six to nine months. If there is a huge demand to go public, underwriters may need to delay scheduled offerings due to the number of IPOs in their queues. SPACs, which have fewer moving parts, tend to take four months or less once a target is identified.

IPOs can be exciting. The lengthy lead-up to the public offering can generate buzz in the market, which can drive up share prices. Yet these deals are also volatile. Even companies that have successful launches often see share prices drop after the IPO. This often happens when the hype around the IPO drives share prices over what the company is worth. IPOs can be moneymakers, but they can also bring significant losses. These are only for investors that will do the due diligence to understand the true market value and the level of risk they face should they choose to buy.

SPACs offset some volatility associated with IPOs by decreasing the price uncertainty associated with share prices. During the SPAC deal negotiation, the two sides will fix a valuation for the business. When shares begin to trade, the price is already set. SPAC investors also retain more liquidity during the deal process. Investors need to formally opt in before the deal can proceed, so they preserve an escape hatch. Given the market volatility, SPACs have developed a reputation as less risky than IPOs. They are also cheaper: Underwriting and deal completion fees associated with SPACs tend to come in the 5% to 6% range, versus a 7% range for IPOs.

Get Help Taking a Company Public

What is a SPAC vs. IPO? Understanding the difference is necessary so you can make the right decision regarding taking a company public. Determining which route to take is only part of the process of going public. These deals are complex. Companies need the right partner that can help them stay organized throughout the deal and due diligence process, file all the paperwork, and reduce overhead and risk associated with the SPAC or IPO process.

DFIN offers extensive solutions for SPAC and IPO processes. Our end-to-end platform solution provides companies with a dedicated workflow, virtual data room, robust analytics and 24/7 support throughout the process. Major companies rely on DFIN for guidance, competitive advantages, and seamless delivery throughout the SPAC and IPO processes.