When companies first come into existence, they do not really know when they will require additional capital, or how they will accumulate it, to successfully run (and grow) their business. Opting for an IPO is one of the most popular ways to raise capital and boost public profile. By selling company shares to the public, organizations can expand their business, fund upcoming research and development, and even pay off debt.

But given the time and effort that goes into the IPO process, many companies are now opting for a Special Purpose Acquisition Company or SPAC that allows them to quickly pool funds in order to finance a merger or acquisition opportunity – within a defined timeframe.

In this first part of our two-part series on “Simplifying SPAC Mergers”, we will deep dive into the fundamentals of SPACs: right from what they mean, their typical equity structure, trend analysis, and the benefits and risks of SPACs vis-à-vis IPOs.

Economics explained for the Founder, Investor, and Target

According to a recent report by Wall Street Journal, SPACs raised a record $82 billion in 2020 along, setting a new all-time record.

Companies that are looking to go public are increasingly evaluating if the benefits of merging with a SPAC would be preferable to an IPO. Although this depends on many factors, here’s the economics explained for the founder, investor, and target:

Trend analysis

SPAC mergers, although extremely beneficial, aren’t simple, and require careful understanding of all the intricacies. When done right, SPACs can offer quick and lucrative results for companies, and that’s exactly why the trend is picking steam across the globe. Here’s looking at some impressive numbers as stated by KPMG:

Typical equity structure and PIPE financing

Although SPAC sponsors are constantly on the lookout for investors who can pool in money, in some cases, they need to arrange for the second category of investors to supplement the original IPO proceeds with additional funding. Via a private investment in public equity or PIPE commitment, they can buy shares of publicly traded stock at a price below the current market value, and raise capital as required.

Although a publicly-traded company may utilize a PIPE to fund day-to-day operations, upcoming expansion, or future acquisition, the equities never go on sale on a stock exchange. Instead, investors can purchase the company’s stock in a private placement, and not worry about registering PIPE shares in advance with the SEC or comply with federal registration requirements for public stock offerings – thus enjoying the faster speed and fewer administrative requirements.

SPAC versus traditional IPOs – the benefits and risks

When discussing SPAC, it’s impossible to not compare it with its distant cousin – the traditional IPO. So, here’s how SPAC is different from an IPO:

For any private company, raising capital is a fundamentally complex part of the growth journey. However, this complexity can greatly be minimized by taking the SPAC route that allows companies to go public – quickly and efficiently. With SPACs raising approximately $26 billion in proceeds in a single month – setting a new record – it makes sense to take the SPAC route to enjoy higher valuations, ensure greater speed to capital, and not get bogged down by a slew of regulatory demands.

Stay tuned for our second part of the SPAC Merger series to learn about the financial, accounting, and reporting considerations to keep in mind while taking the SPAC merger route for sure-shot success.

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