SPACs (Special Purpose Acquisition Companies) experienced a boom in 2020 and are continuing to surge in popularity as an alternative route for companies to go public. A SPAC raises cash in an IPO and uses that cash to acquire a private company. A SPAC is usually led by a seasoned management team and backed by a sponsor. Increasingly the management teams and sponsors come from the world of private equity and execute on multiple SPACs often within a short period of time. The major differences between a SPAC IPO and a traditional IPO revolve around the length of the process, the amount of disclosure in the offering document that is filed with the SEC, and the process around valuation of fund raise.
Commonalities Between SPAC IPOs and Traditional IPOs
Let’s start with what’s in common: Both traditional IPOs and SPAC IPOs have to go through an approval process with the SEC and raise funds in the public market through an initial public offering and the listing of their securities on an exchange. But SPACs have several key differences from a traditional operating companies and SPAC IPOs have been called a backdoor way of doing an IPO.
Key Differences in SPAC IPOs versus Traditional IPOs
SPACs can be formed and go public in a matter of months whereas an operating company may take anywhere from nine months to several years to go public when including the required preparations. The reason for the quicker timeline is that SPACs are not operating companies and have limited amount of information to disclose in their registration statement. A private company that merges with an already publicly trading SPAC has to file a proxy statement and an S-4 and received approval from its shareholders, but all of these things can be done faster than if the same private company had chosen to go public through a traditional IPO.
- Buying Window
SPACs have a limited time, usually between 18 and 24 months, to complete an acquisition. If they fail, they must liquidate and return all funds raised in the IPO to investors.
- Price versus Market Volatility
By going public via a SPAC, the target company will know the price at which it will be acquired by the SPAC and will generally be less prone to price volatility due to unstable market conditions. The SPAC and the target company can privately agree on a transaction and set a price, before publicly announcing their deal, thereby reducing the risk of the market or individuals affecting the terms or the transaction price.
SPAC sponsors receive what’s known as the “promote,” which is 20% of equity in the combined company. This compensates the sponsors for the risk they take in putting up their at-risk capital to form and operate the SPAC between the time of its IPO and the De-SPAC, but effectively dilutes the public shareholders’ ownership of the IPO.
- Less Scrutiny
Going through a traditional IPO exposes a company to enormous scrutiny over the months leading up to the IPO and can result in uncertainty around valuation up to the pricing of the IPO. SPACs, on the other hand, are not operating companies and are, therefore, usually not hotly debated or examined. However, with increased emphasis and media attention focused on SPACs, some SPACs, including those with celebrity names attached to them, have experienced a level of scrutiny akin to a traditional IPO.
For a private company that wants to go public, merging with a SPAC can be easier and faster than going through a traditional IPO process. Unfortunately, as SPACs continue in popularity, some may make costly and notorious mistakes that will likely reverberate throughout the currently overheated SPAC market.
As they go through their IPO and the subsequent M&A process, SPACs face many regulatory, legal, and business hurdles, including obtaining the appropriate amount and type of insurance for each stage of their life cycle. But with careful preparation and the expertise of the right advisors, insurance can go from being a necessary hurdle to a strategic asset.
Woodruff Sawyer is a leading insurance broker in the SPAC market, protecting more than $40 billion in SPAC assets. Woodruff Sawyer is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a critical element of the SPAC M&A process.
Read more about SPACs.