What Is a SPAC IPO vs Traditional IPO? Definition and Examples
What is a SPAC IPO? As some of the most anticipated IPOs choose to go public via SPAC, it’s a question people are asking more and more. So let’s look at what a SPAC is and why companies choose to go this route.
What Is a SPAC IPO?
SPAC stands for special purpose acquisition company. These are also known as blank-check companies. They’re companies with no business operations. Instead, they raise funds in initial public offerings (IPOs). The SPACs then use that money to acquire a private company.
Although the SPAC is already public, the process of the merger is still considered a SPAC IPO. And because the SPAC is a public company, the private company becomes public as well. The SPAC will usually change its ticker symbol to reflect the acquired company or the newly merged company.
SPAC vs. IPO vs. RTO: What’s the Difference?
There are three main routes for a private company to go public.
Traditional IPO Process: The company needs to file multiple forms with the Securities and Exchange Commission. Many companies opt to confidentially file. This means the filings are not public. The Jumpstart Our Business Startups (JOBS) Act of 2012 introduced confidential filing to support small businesses looking to go public. The filings are required to be made public 15 days before the offering. Filings include the company’s prospectus, financial data, industry data and a company analysis.
Once all of the required paperwork is in, the company will present its IPO roadshow. This gauges investor demand to determine the pricing of the IPO. Once a price is determined, the stock goes live on the market. The traditional IPO process is in-depth and usually takes between six to nine months.
SPAC IPO: The process for a SPAC IPO, as described above, is significantly shorter than the traditional IPO. Instead of half a year or longer, the entire process takes about 15 weeks from start to finish. There are no historical financial data or assets to be described. The lack of information needed leads to less involvement from the SEC. And overall, many analysts feel SPAC IPOs provide less risk.
Many companies are starting to take the SPAC IPO route because of its time-saving nature. Additionally, SPACs already have investors, rather than needing to find investor demand with an IPO roadshow.
Reverse Takeover: A reverse takeover (RTO) is a SPAC IPO in reverse. Instead of a public company acquiring a private company, a private company acquires a public company. By doing this, the private company effectively becomes a public company. The RTO process is similar to the SPAC IPO, but it can often require transaction and due diligence fees to target the right blank-check company.
SPAC IPO Examples
One of the first and most well-known SPAC IPOs was Virgin Galactic Holdings (NYSE: SPCE). In 2019, the company listed on the NYSE after its successful merger with Chamath Palihapitiya’s venture Social Capital Hedosophia. It’s the first and only public commercial human spaceflight company. Shares closed at $11.75 at the end of its first day of trading. At the time of this article, shares trade for about $25.
One of the more recent and popular SPAC IPOs is Nikola (Nasdaq: NKLA). Nikola stock came about through its merger with VectoIQ Acquisition in early June 2020. Many people know the company as Tesla’s rival. But Nikola’s IPO opened the door for others.
There are two other electric vehicle companies looking to go public via SPAC IPO: Hyliion and Fisker. Both have entered into business combination agreements. Investors hope to see both companies’ stock on the market before the end of 2020.
IPOs can often be great investment opportunities, such as the rumored Ant Financial IPO. But the IPO market is changing. More companies are favoring going public via SPAC. So investors should keep an eye on SPAC stocks. SPAC IPOs could be the next big trend.
About Amber Deter
Amber Deter has researched and written about initial public offerings (IPOs) over the last few years. After starting her college career studying accounting and business, Amber decided to focus on her love of writing. Now she’s able to bring that experience to Investment U readers by providing in-depth research on IPO and investing opportunities.