The use of SPACs to raise funds has grown in popularity over the past few years. SPACs and IPOs are popular methods for companies to go public. However, a SPAC versus an IPO has key differences.
Both SPACs and IPOs are opportunities for investors to place their funds in promising startups. So what are the characteristics of a SPAC compared to an IPO? Moreover, what drives companies to take one route or another to make their public debut? We’ll take a look…
SPAC vs IPO: Understanding SPACs
SPACs have become a serious alternative to the traditional initial public offering (IPO), even though they are sometimes marketed as a “backdoor” to the IPO.
SPAC stands for Special Purpose Acquisition Company. They are also called blank check companies. Blank check companies don’t run businesses – they don’t have any products or services to offer. Instead, they raise money by selling shares to the public in an initial public offering (IPO). These companies go public with the sole purpose of finding a private company to merge with.
As soon as the SPAC finds its target company, the public SPAC and the private company merge. Then, the SPACs acquire a private company with this money. The merger allows the company to go public and list on a stock exchange.
Even though the SPAC is already public, the merger process is still considered a SPAC. Since SPAC is a public company, the private company also becomes public following the merger. As a result of the acquisition or merger, the stock symbol of SAVS will generally change.
SPAC vs IPO: Understanding IPOs
The IPO process is when a private company sells shares to the public for the first time. Shares of the company are usually traded on a stock exchange, where investors buy and sell stakes in the company. There are different types of IPOs. However, a typical IPO looks like this:
Private companies usually hire investment bankers to get started. This is the process of advising and managing an IPO by investment bankers known as underwriting.
The underwriter assists the company in filing its S-1 prospectus with the Securities and Exchange Commission (SEC). In addition to financials and projections, this document describes how proceeds from the IPO will be used, as well as the potential risks associated with the transaction.
Following an IPO approval, underwriters typically hold “roadshows”. Institutional investors attend these events to get an overview of the company and its IPO. Additionally, roadshows gauge investor demand to determine the IPO price. In addition, the underwriters will allocate a portion of the shares to institutional investors should they wish to purchase.
The underwriters help the company choose stock exchanges and stock symbols before the trading day. The subscriber will then buy shares of the company and then transfer them to the stock exchange. After the transfer, the shares are offered to the public.
Additionally, you can learn more about the IPO process in this step-by-step guide to going public.
So what is the difference between a SPAC and an IPO?
SPAC vs IPO: what’s the difference?
Companies often choose to go public via SPAC or IPO. However, these are very different from each other.
Initial Public Offering: The SEC requires the company to file several forms with it as part of the traditional IPO process. Many companies choose to file confidentially. This means that their repositories are not publicly available. However, the deposits must be made public 15 days before the offer.
The traditional IPO process is thorough and typically takes six to nine months.
after-sales service: Compared to an IPO, the process of a SPAC is significantly shorter. From start to finish, the whole process takes about 15 weeks. The whole process does not require the declaration of historical financial statements or assets. As a result, the SEC is less involved in the process as a whole.
The time and cost saving nature of SPACs makes them attractive to businesses. Moreover, SPACs already have investors. Thus, they don’t need to find them via an IPO round.
Investing in SPACs vs IPOs: 2 Key Things to Know
There are two key things to keep in mind when considering investing in SPACs and IPOs.
Traditional IPOs are not open to everyone
Direct participation means that you can buy shares at the IPO price before they are traded on the secondary market or the stock market. Institutional investors or clients of underwriters usually get the first notice of a transaction.
Companies that go public may also offer directed sharing programs. This allows certain eligible individuals to purchase shares at the IPO price. This includes friends, family and employees.
On the other hand, retail investors usually have to wait until the stock is available in the public market before they can buy shares at the trading price.
Participating in an IPO as a retail investor is challenging. Nevertheless, if you are interested in participating in an IPO, you should consult your broker for a list of your options. Occasionally, a brokerage firm will allow qualified individuals to purchase shares at the IPO price.
IPOs are more transparent than SPACs
Individual investors may have more access to SPACs, but they are generally considered less transparent than traditional IPOs. When evaluating a SPAC investment, you should generally rely on the reputation of the SPAC sponsors (the company or person who set up the SPAC).
This is because little information about the operation of the company is available. Additionally, there is no documentation of the company’s financials and projections. So the SPAC investment may be more of a gamble.
The level of risk with SPACs is higher, so there is more uncertainty for investors. Thus, to understand these terms, as well as the characteristics of the SPAC and the background of the management team, you should carefully review a SPAC’s prospectus and filings.
For example, most SPACs specify a specific line of business that they will seek to acquire. However, SPACs do not have to follow through on their plans, even if they have a specific target industry in mind. Ultimately, they might end up acquiring a business in a completely different industry. In fact, they might acquire a business in an industry that you’re not interested in.
SPAC versus IPO: the essentials
The first thing to keep in mind is that no investment guarantees returns. Additionally, IPOs and SPACs can be risky investments. In terms of performance, they can be subject to a lot of uncertainty and volatility.
You may need to prepare for strong price fluctuations, for example. It’s not uncommon for IPOs and SPACs to generate high expectations at first, but disappoint once the initial excitement wears off.
It is important to understand that IPOs and SPAC investments are risky investments that are not suitable for everyone. Consider consulting a financial advisor if you want to know if it’s a good fit for your investment risk tolerance and overall financial goals.
As always, be sure to do your research before investing. IPOs and SPACs can be volatile for the first few months. And stock prices can change quickly. But if IPO investing interests you, check out our top recent IPOs and IPO timeline. We update it daily to give you the latest news on upcoming and filed IPOs.
Aimee Bohn is a graduate of the College of Business and Economics at Towson University. His background in marketing research helps him uncover interesting trends. Over the past year, she has primarily focused on researching IPOs and other trends.