Special Purpose Acquisition Companies (SPAC)Is SPAC a better Alternative than IPO?

April 9, 20210

Is SPAC a better Alternative than IPO?

As discussed earlier, in this series of 5 articles, going public for companies via SPAC can be an alternate route of IPO. From a perspective of a target business and its owners, the small company can raise cash without having to go through the hassle of conducting IPO.

This saves a lot of marketing costs for the target company which otherwise would have incurred through traditional IPO process.

SPAC offers a simple model to raise funds from public market and then a company can be searched to be merged with. It also is less risky for the company compared to the traditional IPOs.

In case of SPAC one can sign a deal with one person for a fixed amount of money at a negotiated price and then sign the deal.

SPAC has also changed the notion that for higher standards there’s a longer process, and that the market is not structured to rapidly turn a well- hyped business into public companies.

An example of Nikola, Draftkings, and Virgin Galactic can be taken as these big heads went public through SPAC. A traditional IPO raises money to finance the company, but the owners usually cash out the shares from the deal.

If SPAC is a purchasing entity, there will not be any need of selling shares and hence it makes it convenient for the management and owners of the company.

SPACs also provide more certainty in and are the faster alternative than the traditional IPOs.  SPACs give an opportunity to raise capital in 4-6 months whereas an IPO takes a longer timeframe compliance burden. This excess time can help the sponsor to focus on increasing the value of shareholder and decide upon a strategy to acquire the target company.

In case of SPAC, the investors have a right to redeem the money at appropriate stages. In US, a SPAC is required to execute a merger or combination of business within 2 years of going public. If the SPAC fails to do so, it is required to redeem the entire amount to shareholders.

Going by various benefits of SPAC, it can be considered to be a better version and option than IPO, in our next write up we are going to focus on Advantage and Disadvantage of SPAC

For any feedback or query, feel free to connect with mumbai@amlegals.com

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