In order to become publicly traded, businesses need to determine the most effective means of obtaining funding from the capital market. The Initial Public Offering (IPO) and the Special Purpose Acquisition Company (SPAC) are two prominent methods that are frequently utilized in the process of going public. Before making a decision on a strategy, firms should first assess their objectives, their financial status, and the current state of the industry. Every tactic comes with its own set of advantages and disadvantages.
Going public through an initial public offering (IPO) is the most common method for a company to do so. An initial public offering (IPO) is when a company makes new shares available to investors through an underwritten offering. In order to complete the process, which may take several months, it is necessary to fill out a significant amount of documentation for the government and to conduct roadshows in order to attract the interest of investors. An initial public offering (IPO) requires a significant investment of time, money, and effort from the government; yet, it may reward you with a great reputation and worth. Because of the instability of the market, prices are also subject to fluctuation, which makes this strategy less guaranteed.
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On the other side, a shell company is a firm that was established only for the purpose of raising capital through an initial public offering (IPO) in order to join a private corporation and then become public. SPACs are more flexible, speedier, and less expensive than standard initial public offerings (IPOs). Through direct communication with investors on the value of their company, they assist businesses in avoiding a significant amount of the uncertainty that is associated with an initial public offering (IPO). SPACs, on the other hand, have a number of significant risks, such as the possibility of being inspected by authorities and the loss of value for shareholders.
In accordance with its objectives, a firm may select between an initial public offering (IPO) or a special purpose acquisition company (SPAC). An initial public offering (IPO) is the best option for a company that wishes to establish credibility and confidence with investors. A SPAC is the best option for a company that wants to move quickly and maintain confidence in its ability to achieve success. In order to make the most appropriate decision, you need to take into consideration your long-term plan, the current state of the market, and the amount of money you have available.
The Trade-Off
The choice between them is a classic trade-off:
| Feature | Traditional IPO | SPAC Merger |
| Speed | Slow (12-18 months) | Fast (3-6 months) |
| Pricing | Market-driven, volatile | Negotiated, greater certainty |
| Disclosure | High, rigorous regulatory scrutiny | Lower, generally less stringent |
| Risk | Lower dilution risk | Higher dilution risk (Sponsor “promote”) |
| Post-Listing | Generally better long-term performance track record | Mixed performance, often underperforms |
A Comparison of Initial Public Offerings (IPOs) and SPACs in the Capital Market
If a private company is interested in “going public” and gaining access to the large amount of capital that is available in the public market, it typically has two primary choices: either it can merge with a Special Purpose Acquisition Company (SPAC), or it may conduct an initial public offering (IPO).
Common initial public offering
The initial public offering (IPO) is the strategy that has consistently been successful. In addition to this, the private business engages in the process of doing thorough due diligence and employs underwriters. In addition to that, it sells its shares by means of a “roadshow.”
- The process is lengthy and laborious, typically lasting between 12 and 18 months.
- During the book-building process, prices are established in the market, which might result in price fluctuations on the first day of trading. These fluctuations can be positive or negative.
- The fact that it is well-controlled, which makes it incredibly trustworthy and open, is an advantage.
An Alternative to the SPAC Option
SPAC is an abbreviation that stands for “blank check company,” and it refers to a shell company that raises capital through its own initial public offering (IPO) in order to acquire a private firm that is already in existence (the “de-SPAC” deal).
It typically takes between three and six months to complete the merger, which is a speedier time frame. The SPAC is currently accessible to the general public, which makes things easier to understand.
- Price: The sponsors of the SPAC and the corporation that is the target of the SPAC might reach an agreement on a price through private discussions, which makes the pricing more specific.
- It is both speedy and flexible, and the target firm also benefits from the experience of the SPAC’s seasoned sponsors. On the other hand, it is a disadvantage.
In a nutshell
The initial public offering (IPO) and the merger of a SPAC are both viable options for entering the public market, despite the fact that they cater to distinct business requirements. When it comes to well-known corporations that want to keep their image high while keeping the interests of their shareholders low, the classic initial public offering (IPO) is still the best way to take. On the other hand, the SPAC is an ideal solution for companies that are willing to take on more structural risk and the risk of dilution in return for speed and pricing certainty. This is because the SPAC offers both of these benefits. The optimal choice will be determined by the degree to which the company is performing financially, the degree to which it is prepared for public inspection, and the manner in which it intends to develop.
Also Read: Obtaining PR for Founders Raising Capital: How Otter PR Helps Secure Media Coverage that VCs Notice
