In the world of business and high finance, there are always all sorts of acronyms floating about, including SPAC and IPO. Knowing what these terms mean, as well as how they fit into your company’s business, is important knowledge to have. Typically used when bringing a private company public, knowing which to use in your own unique situation can help streamline a complex and often stressful business transaction.
What Is a SPAC?
In order to understand what a SPAC is, you must know what a shell company (or shell corporation) is. A shell company is a company that has little or no assets or any active business operations. Although the idea of a shell company may look fishy to those on the outside (and indeed, shell companies are often created to mask a lot of funny business dealings), there are legitimate reasons why they exist. These reasons include using shell companies to raise capital, perform a hostile takeover or to go public. However, in some cases legitimate businesses use them to mask company ownership, avoid taxes and engage in other shady activities, therefore the suspicion is raised when the term “shell company” is mentioned.
But back to the SPAC. A SPAC (short for special purpose acquisitions company) is a shell company created with the sole intent of raising capital via an IPO with the goal of acquiring another company. Hardly a new invention, SPACs have been part of the high finance world for decades and are a legitimate part of the IPO universe.
Obviously, there are all sorts of rules and regulations for SPACs, such as a time limit (two years to complete the acquisition or the funds will be returned to the original investors) and how the funds are to be held (in an interest-bearing account), as well as many others. After the acquisition is completed, the SPAC is listed on one of the major stock exchanges.
What Is an IPO?
An initial public offering (IPO) is the mechanism whereby a private corporation offers shares for sale to raise capital. Typically underwritten by an investment bank, an IPO allows the company to be listed on one of the stock exchanges. Also known as “going public,” an IPO is what converts a private company into a public company. Again, this entire process is strictly regulated by the Securities Exchange Commission (SEC), a federal government agency tasked with overseeing the stock exchanges.
SPAC vs. IPO
A SPAC — a company with no business or assets — is used as the vehicle to raise capital to acquire an existing business. This is in contrast to an IPO, in which a company is able to raise capital without taking on additional debt. One financial professional summed it up like this: “An IPO is a company looking for money, while a SPAC is money looking for a company.”
There are pros of using a SPAC over an IPO. These include the following.
- Speed of transaction: SPAC mergers average 3–6 months compared to an IPO’s 12–18 months.
- Upfront price discovery: Unlike an IPO, whose price depends on the market conditions at the time of listing, a SPAC’s pricing is negotiated before the transaction closes, which is good during times of market volatility.
- Lower marketing costs: Unlike the IPO “road shows,” a SPAC merger doesn’t require ginning up interest from well-heeled investors.
On the flip side, there are cons as well, which are the following.
- Shareholder dilution: SPAC sponsors typically have a 20% stake in the company through “founder shares” as well as the option to purchase additional shares.
- Less time to prepare: With a shorter time frame, a SPAC puts plenty of pressure on the target company, as the target company has to handle the legal necessities of the process, including SEC filings, establishing investor relations departments and internal controls and other details.
- Less financial diligence: Unlike the highly regulated IPO, the SPAC process has a much less regulated due diligence process.
Where a VDR Fits into All of This
A Virtual Data Room (commonly referred to as a VDR) is a vital component in any SPAC or IPO transaction. A VDR is a secure online location where companies can store and share the documentation that is required for the transaction. A robust VDR features secure access, which includes enterprise-level encryption, multiple layers of security and user-friendly admin controls that allow you to seamlessly upload and download documents, protected by version control, and allows only certain parties access to certain documents.
Having a trusted third-party VDR provider like Caplinked that utilizes all the appropriate tools for the transaction is mandatory for any SPAC or IPO. The cost savings and time and energy saved from partnering with Caplinked, an industry leader in the VDR space, will certainly streamline the process. Caplinked’s VDRs include advanced management features, document collaboration controls, customizable permissions and more. Reach out today to start your free trial.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
KPMG – Why Choosing SPAC Over IPO
Deloitte – SPAC Risk Trends