SPAC is the not-so-new way of going public that has been getting the limelight recently.
A special purpose acquisition company (SPAC) is a corporation that does not have commercial operations. It is rather formed to generate capital through an initial public offering (IPO) to acquire a company. While SPACs have been around for a long time, they have only received public attention recently from digital media giant Buzzfeed and Amazon aggregator Thrasio (which is now a canceled plan) going public via SPAC as well.
In 2021, SPACs raised US$16 billion in capital from IPOs. To make sense of SPACs and their IPO activity, let’s take a deeper look at how a SPAC works and why companies are choosing to go the SPAC route.
Why do companies go public through SPAC?
One of the key reasons for going public through SPAC is that it gives companies access to capital. Often, a lot of small or mid-sized companies might want to raise capital but are not fit to list for an IPO because of their present size or valuation. By merging with a SPAC, they gain liquidity while maintaining their stake.
Another advantage of listing through a SPAC is that a company can go public faster. While a traditional IPO usually takes about 12-18 months to go through, a SPAC merger only takes 3-6 months.
Merging with a SPAC also means gaining access to experienced leadership teams. As previously mentioned, SPACs are made up of skilled business professionals. A team of people with business acumen could provide the company with proper guidance on how to accelerate growth.
Are there any downsides to going the SPAC way?
It is important to note that going public through SPAC is not all fun and games. Founders of a SPAC get to keep 20% of the equity of the SPAC as “sponsor promote”. This means that a company going public through a SPAC would lose out on a lot of precious equity and would get diluted.
Investors can also be at a disadvantage from investing in SPACs. A SPAC’s founders are sometimes in a rush to find companies to acquire because of the time constraint imposed by the SPAC process. This can sometimes lead to the acquisition of companies that have worse financials than a typical IPO.
As more and more SPACs crop up in the market, they will have to compete in who gets to acquire a particular startup. This competition would be largely based on price and would ultimately spell trouble for investors who would now have to settle for lesser returns.
However, in spite of these issues, SPACs seem to be on the upswing. As of July 2021, there have been about 359 SPAC filings in the United States. The benefits of a shorter timeline, increased processing speed, maintained liquidity and access to advanced leadership are the key reasons for the growth of SPACs as a bona fide way of going public. Venture capitalist David Chao puts it best when he says, “the rise of SPACs is largely driven by the fact that the hurdle has been too high for going public in the regular way.”
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