Special Purpose Acquisition Companies
Startups are now more than ever taking their companies public through special purpose acquisition companies (“SPACs”). SPACs do not take part in commercial operations and are commonly known as “shell companies.” These companies are designed to raise enough money to discover a target company and secure a reverse merger. After funds are raised, the SPAC must complete an acquisition (via a reverse merger in which a public company, in this case, the SPAC, acquires a private company) within two years, or the money raised will go back to its investors. This system allows the private company to avoid the drawn-out and complicated process of going public autonomously.
Many companies are noticing and taking advantage of the benefits associated with selling to a SPAC. Compared to a typical private equity deal, a company sold to a SPAC may retain an increase in the sale price of up to 20%. Furthermore, companies may avoid the lengthy process of an initial public offering (“IPO”) if acquired by a SPAC. Essentially, SPACs offer business owners a faster IPO process with experienced partners and officers within the SPAC guiding the operation.
Spotify and Slack have both become increasingly opposed to following the conventional IPO route after learning of its myriad disadvantages: an expensive process, equity dilution, loss of management control, and the possibility of increased liability. In recent times, traditional IPOs have caused companies’ share prices to dramatically increase in the early stages of trading. This price increase could have been capitalized on by the company’s private owners in the valuation stage before going public. For instance, companies are missing out on money that could have been theirs as they are observing this sharp share price increase on the first day of trading. This trend evidences that many customary IPO offerings have been underpriced. SPAC IPOs, however, have not experienced this disadvantageous and costly price increase. Compared to that of a traditional IPO, SPACs routinely result in a marginal increase in the share price. This marginal share price increase on the first day of trading is beneficial to SPACs because it mitigates the cost of the 20% ownership stake given to SPAC sponsors and founder shares.
Where the risk of failure to raise capital is constantly looming over the traditional IPO, SPACs allow companies to mitigate this risk. SPACs raise money from investors and hold on to the funds until an acquisition is made. Private companies need not determine the most opportune time to make their IPO in a volatile market — the SPAC market is nearly always active and provides a safe alternative. In fact, SPACs are particularly hot commodities; their IPOs hit a record of $13.6 billion in 2019 — over four times greater than 2016.
Companies that are soon looking to go public should perform their due diligence in determining whether they should use an IPO or SPAC. Due to the recent volatility of a global macro-market economy amidst COVID-19 concerns, IPOs continue to pose unjustifiable risks to business owners. SPACs provide a safer and less costly public option for companies looking to grow.
Questions about SPACs or anything related? You can book a time to chat with me HERE.
 Spotify Technology SA (SPOT US Equity), Bloomberg Law, (July 29, 2020), (https://www.bloomber).
 Slack Technologies Inc (WORK US Equity), Bloomberg Law, (July 29, 2020), (https://www.bloombergla).
 Terry Masters, Disadvantageous of a Business Going Public, Chron, (May 8, 2019), (https://smallbusiness.chron.com/disadva).
 ANALYSIS: SPACs Fast Becoming Accepted Third Way To Go Public, Bloomberg Law, (July 29, 2020), (https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-spa).
 Nate Nead, Advantages of a SPAC, Investment Bank, (December 15, 2014), (https://investmentbank).
 Julie Young, Special Purpose Acquisition Company (SPAC), Investopedia, (February 26, 2020), (https://www.investopedia.com/terms/s/sp).