Special Purpose Acquisition Company (SPAC) vs. Initial Public Offering (IPO): What is the difference?

A lot of organizations that want to go public have the common question of whether merging with a SPAC is better than an IPO and what are the main differences between a Special Purpose Acquisition Company (SPAC) and an Initial public offering (IPO).

 

The benefits of both SPAC and IPO vary greatly from organization to organization. Private companies are likely to find more benefits in a SPAC merger, such as speed and price, but it has its own challenges as well. 

 

In this article, we will explore the differences between IPO and SPAC in detail. 

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What is Initial Public Offering (IPO)?

A typical approach for a business to receive capital from the general public is via an initial public offering (IPO).

 

An established business seeks to issue and sell shares on a public market via an IPO. There is already a corporation that is going public. 

 

Typically, a company will operate on private funds to build its business strategy, product, and service (raised from founders, private investors, loans, and various other sources). However, the resources made accessible by private capital are often somewhat constrained.

 

A business may obtain capital from a large pool of prospective investors by issuing an IPO. Offering stock shares for sale on the open market achieves this. 

 

The corporation itself sells its stock in this area, referred to as the main market. A business receives compensation for each share of stock sold on the open market.

 

What is a Special Purpose Acquisition Company (SPAC)?

Issuing an IPO is a traditional business practice. However, the concept of SPAC is relatively newer. SPAC is also known as the blank check company. 

 

It became highly popular in 2019 and 2020. With a SPAC, you create a shell company that exists only on paper. The company will have a management team, a bank, and some initial funding. 

 

Moreover, it involves going through the entire process of IPO readiness assessment and issuing the IPO in which the blank check company sells the shares to raise capital. 

 

Since SPAC does not have significant assets or working operations, the disclosure process for a SPAC in an IPO is quick and efficient. Professional accounting firms in Malaysia can help companies prepare and execute both SPAC and IPO efficiently.

 

Another way to understand SPAC is to think of it as a publicly-traded buyout company that raises money through an IPO to gain a controlling stake in an organization. After going public, SPAC typically has about two years to acquire one or more companies. 

 

Once a company is acquired by a SPAC, it goes public without paying for an IPO. Hence, it is a cost-efficient way of going public as all of the charges and underwriting fees are covered before the target company gets involved. 

 
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SPAC vs. IPO

It is evident that there are some distinct differences between SPAC and IPO. Experts have often criticized traditional IPO investors for having a short-term mindset that leads to mispricing and business inefficiencies. Such concerns are removed by SPAC. 

 

Even though SPAC is cost-friendly, it has some serious risks as well. A major risk is that the investors have the right to withdraw their investors if they are not happy with the target company. 

 

The management will identify the best acquisition, but if the investors change their minds later, it can be a significant loss. 

 

A major reason behind the rising popularity of SPAC is that its value is linked to how much money is raised from investors. Therefore, it is less vulnerable to the fluctuating situations of the market. Investors also say that a recession can lead to greater buying opportunities for SPACs.

 

Final Thoughts

Going public by launching an IPO or by merging with a SPAC are two of the most popular options for the majority of private companies. Ultimately, the choice depends on the type and scale of the business. Both IPO and SPAC have their own set of pros and cons. 

 

The current business landscape supports SPAC, but it is highly possible that an IPO might be a better option for a company. Therefore, it is important to rely on experts like the accounting firm in Malaysia to conduct IPO readiness assessments to make the best choice.