SPAC IPOTraditional IPO
Structure:Allows for varied return and risk profiles and timelines for investing; SPAC can offer risk-free return with upside.Not true of traditional IPO
Flexibility:Initial plans can change (investment in different industry), >1 SPAC can combine to invest in one target company or single SPAC can invest in > company; merger deal terms may be customized based on market conditions and identity of targets.Terms are stated in initial prospectus unless it is amended through a cumbersome process/reissuance. No opportunity to include PIPE and other financings or to include multiple companies in IPO.
Sponsor-side selling points to target (primarily “myths” according to John Coates, former Acting Director of Division of Corporation Finance at SEC):Quicker capital raise (3-5Mos?) (disputed by John Coates); cheaper underwriting fees (disputed by Klausner), less dilution (disputed by Klausner); more certainty and transparency, higher valuation, less opportunity for leaving “money on the table” at closing and initial drop in share price; valuation of target shares is negotiatedMore painstaking initial offering (9-12 mos. according to Harvard study); underwriters set value, which may be a surprise; underwriters control allocation of shares and may leave money on the table for client “pop”
Types of sponsors/promoters:Typically, industry executives with deep experience in target industry are included in promoter group and stay on after merger.Generally, limited to underwriting firms that disappear following public offering – company executives stay on to run the company.
Risk to initial [non-redeeming SPAC] SH:May be higher due to dilution, sponsor conflicts of interest, and looser disclosure of risks to investors – few promises in blank-check prospectusTarget company and underwriters have fraud liability under securities laws for any failure to disclose, but disclosure in prospectus is limited (no projections), so this benefit may be illusory.
Reliance upon sponsor judgment:Greater, due to blank-check nature of offering, although investors can redeem. Proposed regs would require sponsor fairness opinion.What you see is what you get.
Funds raised:Traditionally higher. According to Reuters, average size of SPAC during 2019-2021 period exceeded $300MM.Not as high – The median size of IPOs in the United States increased significantly in 2020. The median IPO size reached $177MM U.S. dollars, down three million compared to the previous year.
[See: median IPO size bar chart]
Time to close IPO:Quicker process than traditional IPO in part because initial money raising is before negotiation of price with target and SEC review of SPAC offering is limited. If proposed regs are adopted, additional time may be required for SEC review.May be more time with SEC review initially because blank check involves limited disclosure in SPAC prospectus.
Limits on use of projections:SPAC funds can be raised with no projections. SEC safe harbor applies to projections in proxy statements, so target projections can be used to “sell” the merger to SPAC and target shareholders. Proposed regs would make safe harbor unavailable in SPAC target proxy.Due to SEC safe harbor rules, no “forward looking statements” can be put in IPO prospectus
Underwriting costs:Initial underwriting fees are lower; underwriters charge as financial advisors; (Financial Times article reports typical “banker” fees of 2% up front and 3-5% deferred)Might be 3.5-7% of proceeds (according to PWC based upon 827 public filings); 5.4% average in 2020 (Statista,
Dilution:Promoters typically take 20% of SPAC stock for nothing, resulting in significant dilution. SPAC SH share further reduced by PIPE SH shares, share-holder redemptions, sponsor compensation, underwriting fees, outstanding warrants and convertible securities, and PIPE financings. Proposed SEC regs would require additional disclosure re: dilution.Dilution only in issuance of shares to insiders.
Drop in initial public listing price of company after it goes publications:LessMore
Regulatory scrutiny:Not much to look at in SPAC IPO prospectus; proxy statements (by which investors determine whether to redeem or merge) typically get less scrutiny by SEC-Full SEC scrutiny in IPO registration statement/prospectus
Target market:Public securities market + PIPE, debt and preferred investors (mutual funds, family offices, hedge funds, private equity firms, pension funds, strategic investors)Public securities market.
Public v private investment:Private PIPE, debt and preferred investors can invest under SEC registration exemption to raise capital in addition to SPAC proceeds. SPAC SHs can sell immediately after merger.No private offering is involved, typically, although formerly privately-held shares held by insiders often are registered at time of newly-offered shares; downside is that insiders cannot sell out immediately.
Secrecy of terms:PIPE and other private financing terms are not disclosed publicly; some negotiated terms with target probably are not public. Terms are spelled out in detail in IPO prospectus.
Timing of going public:Target company can go public earlier in its life cycle – disclosure in SPAC prospectus is limited and there's no need for projections, which are allowed in proxy statements for target acquisition.Need clean operating history and documentation of operations, formal analysis of risk factors and other matters that must be covered in IPO prospectus of existing company.
Ease of marketing:SPAC can attract investors that are investing for stated return for parked money (like money market funds) in addition to venture capitalists; investors can make decision to redeem or not after target deal is negotiated.Attracts mostly equity risk investors.
Share price:Typically SPAC shares offered at $10 from the outset. Price of target shares negotiated in merger agreement. SPAC SH can redeem if they don't like merger terms.Determined by underwriters based upon market interest shortly before offering; price may be disappointing to issuer.
Warrants:Warrants to purchase additional stock (typically 1:1 to 1:4) at designated price (typically $11.50) enhancing attractiveness of offering may accompany shares in blank check offering.No warrants or rights offered in traditional IPO.
Redemptions of investor's pro-rata share of trust account permitted after target is identified:Yale study finds for earlier SPACs, 58% average, 73% median; in 1/3, > 90% redemptions; later Harvard study of deals that closed 7/20 – 3/21 found only 24% redemptions and 80% with <5% redemptions; as of 3/22, Financial Times quoting Dealogic data fixed the redemption rate at 90%No such option
Conflicts of interest for sponsors:Sponsors put offering costs at risk and are not repaid unless target merger closes within 2-year deadline (which can be extended with SH approval) – incentive to close with less attractive target, if necessary. Proposed regs would require enhanced disclosure re: conflicts of interest.
Tax and accounting considerations:SEC guidance indicates that warrants are treated as debt. Foreign company acquisition may involve PFIC and other complications.
No warrants are involved. Whether company is foreign or domestic is determined from the outset, so investors know of PFIC complications.
Lock-up period for insider shares:Blank check lock-up is longer than for traditional IPO (180 days – one year); target SH lock-up is 180 daysUsual 180-day lock-up period for insider shares
Offering expenses:Born by sponsors on spec basis, to be lost if no target is acquired; may be higher due to complexity of offering, multiple SEC filings and need for multiple financial and legal advisors.Unless offering is withdrawn, offering expenses are reimbursed when shares go public; underwriters provide financial advice; single law firm; fewer SEC filings.
Failure rate:SEC in 2021 said 10% failed. Failure occurs after investment in SPAC shares.Some registration statements are withdrawn but before shares are offered to public.