![]() ![]() Also, these founders and shareholders can avoid lock-up periods (a predetermined amount of time that a shareholder cannot sell their shares) that can be associated with an IPO.Īn important distinction to note here is the different valuation approaches with SPACs and IPOs. Founders and other major shareholders who want to sell some of their ownership position upon going public can sell a higher percentage in a reverse merger than they might be able to with an initial public offering. ![]() A highly leveraged company may have difficulty raising funds in an IPO. Instead of raising funds through an IPO as a private company, a SPAC can be an alternative for those companies that are highly leveraged (i.e., the company has a relatively significant amount of debt as a percentage of its total financing). A SPAC is already public and, consequently, it can allow a company to quickly access public markets. An IPO can be time intensive and carry significant costs. More specifically, some of the reasons a private company might choose to go public via a SPAC versus an IPO include: According to a recent Investor Bulletin from the SEC on SPACs, "Certain market participants believe that, through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional IPOs." Why might private companies choose a SPAC over an IPO?ĭue in part to the SPAC voting rule change, and other market forces, SPACs have become an increasingly popular alternative to IPOs. If more than 50% approve but more than 20% want to liquidate their shares, the escrow account is closed and funds are returned to public shareholders via a pro rata distribution of the net offering proceeds (less any fees for early redemption). If more than 50% of shareholders approve and less than 20% vote for liquidation, then the transaction is approved and the acquired company is listed on an exchange. SPAC investors vote in a proxy to approve or disapprove a proposed acquisition. Consequently, the SEC notes that "the economic interest of the entity that forms the SPAC … often differs from the economic interest of public shareholders, which may lead to conflicts of interest." ![]() While investors have the right to vote on potential deals brought forth by SPAC managers, a risk for SPAC investors is that they may not like acquisition targets. 1 A SPAC can purchase one or more companies, and the managers of a SPAC typically earn a percentage of the value of a potential deal (commonly around 5%). Typically, SPAC sponsors receive roughly 20% of the common equity in the SPAC and 3% to 5% of IPO proceeds. These funds are usually invested in government bonds while the SPAC sponsor seeks acquisition targets. A minimum of 85% of the SPAC IPO proceeds must be held in an escrow account (typically, more than that percentage is held in escrow) for potential acquisitions. The management team of a SPAC (which includes sponsors, directors, officers, and affiliates) decides which companies to potentially acquire.
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