Special purpose acquisition companies (SPACs), like initial public offerings (IPOs), help companies raise money to go public. However, there are important differences. How can you know if a SPAC is a better option for your company?
A SPAC involves a private company merging with a “shell company” that’s already publicly traded. Although the term “shell company” has a negative connotation for some people, shell companies aren’t inherently illegal. What’s illegal is when they’re misused for personal gain. With an IPO, a private company uses an underwriter to issue new shares to sell on a public exchange.
Some advantages of using a SPAC
Using a SPAC to take your company public offers a number of advantages. For example:
- It’s faster – typically no longer than 6 months as opposed to up to 18 months with an IPO.
- It’s not reliant on investor interest, which is required with an IPO, so there aren’t typically marketing costs involved.
- The price isn’t as dependent on market conditions because it’s negotiated with the shell company.
Further, because there’s another company involved, the newly public company has access to experienced professionals.
Potential “cons” of using a SPAC
Of course, using a SPAC may not be the best choice for every company that is ready to go public. There are potential downsides that need to be considered. Among these may be the following:
- The SPAC typically will own at a portion of the publicly traded company (generally around 20%).
- Some SPAC investors may redeem their shares, which could result in the need for more financing.
- There are shorter deadlines for SEC filings and other regulatory requirements than with an IPO.
Further, the company seeking to go public generally has to take most of the responsibility for this process, unlike with an IPO, where the underwriter does it.
A couple of other things to consider
The most popular “targets” for SPACs are in those with an eye to the future. These include companies involved in technology, telecom, media, industrial manufacturing and also consumer-driver businesses in retail and travel (including space tourism). It’s important to consider whether your company is an attractive investment.
David Miller, our managing partner who heads up Graubard Miller’s Corporate and Securities group, helped create the SPAC thirty years ago in 1993. If you’re leaning towards pursuing a SPAC transaction instead of an IPO or if you’re not sure which is best for your company, it’s critical to do your due diligence and to seek sound legal guidance accordingly.