Using a SPAC (aka blank check shell corporation) to go public has gained popularity in 2020, with 200 SPACs raising about $64bn this year, which is more than double the number of SPACs in 2019. A SPAC is a company which starts with a sponsor and gains more investors, goes public and then merges with a target private company, thus enabling the target company to go public without having a traditional IPO process.
For investors, there is money to be made. If you are a well-known investor or investment firm, you may become a SPAC sponsor, like Bill Ackman, Michael Klein, Chamath Palihapitiya, Apollo Global, TPG Capital. There is a huge upside in the value of the sponsors shares if they are successful. Alongside the sponsor, there will be other institutional and retail investors. Institutional investors buy warrants so there is the potential financial upside with limited risk. If the investor does not like the target company, they can get their invested money back, but if they do like the deal and the stock price increases, they have the option to buy additional shares at a potentially lower prices and so increase profits.
Retail investors can’t invest in a traditional IPO so buying shares in a SPAC after it is public but prior to a target company being identified means they now have the ability to participate in the upside of the IPO offering. They do, however face more risk than the sponsor or institutional investor as they can’t get their money back if they don’t like the target company. They also have less reward as they don’t have warrants which would increase potential upside if the stock does well.
5 key takeaways for early-stage companies considering going public
- Going for a traditional IPO is a long, cumbersome process which exposes companies to volatility and uncertainty. The process can last for months if not years, but the share price is uncertain until the day prior to IPO. Political and economic changes may cause market movements which negatively impact your IPO price. A SPAC on the other hand, provides price certainty as the IPO price is negotiated between SPAC management and the company going public. The SPAC merger is also quicker, often taking only months.
- SPAC is a more expensive route than traditional IPO. The sponsor pays only nominal amounts for 20% equity of the SPAC, which may in turn become 1-5% of the stake in your company, that is a large equity cost.
- As the time to go public is shorter with a SPAC, there is more pressure on the company going public. Areas like financial reporting, tax, technology, SEC regulations will all need to be ready for public company status very quickly.
- The SPAC sponsor and team may provide a strategic partnership if they have experience in your industry, and also will be an ambassador for your company which could instill confidence in other public investors.
- Marketing your company in private with the sponsor allows you to tell a compelling story based on future forecasts and trends, whereas going through a traditional IPO process requires a standard SEC S1 filing which is based on historical financials.