Taking a company public is no small endeavor. If you’ve been following the markets, you have likely heard of SPACs (Special Purpose Acquisition Companies). This new method for going public has taken the financial world by storm, and practically everyone in Silicon Valley has either raised one or wants to create one.
Historically, when companies wanted to go public, they’d typically need to do a traditional IPO. Now, companies have three options: traditional IPO, direct listing, or SPAC. Each one has its advantages and disadvantages for taking a company public. Let’s (briefly) explore what each option is, and when a company might prefer one or the other.
Traditional IPO
The traditional IPO process is the way that companies have raised capital for decades. The process is straightforward and well-known. A company or investment bank will start the process by filing an S-1. This form is necessary for every single U.S. company that wants a listing on a national exchange. The company files it typically in anticipation of or conjunction with an IPO.
A company intending to go public then partners with an investment bank to underwrite the shares and sell them to prospective investors. The investment bank essentially handpicks the price and allocation, intending to have 97% of investors interested in the IPO and a 30x over-subscribe rate.
For the most part, mom and pop investors cannot invest in these IPOs. Only the best clients can. Given these aggressive targets, IPOs often result in a large first-trading-day “pop.” A good, recent example of this was nCino, which had an IPO of $248 million and saw a rise of 150% on its first trading day. While fantastic for those early investors, that represents money left on the table for the company itself.
Direct Listing
Given the issues with the traditional IPO process (arbitrary pricing and aggressive sales objectives by investment banks), some companies have turned to direct listings.
This process is similar to an IPO, except that instead of having an intermediary (a bank) underwrite and sell the shares for you, existing investors, promoters, and even employees can sell their shares of the company directly to the public.
As a toy example, let’s assume Acme Co has two investors, A and B. Each investor holds 100 shares. With a direct listing, they could create a ticker symbol, and people could place bids on the shares (like any other stock). A and B could then sell those shares at the bid price or enter their price. Then, of course, whoever buys them can resell them, etc. So, for example, let’s say C buys 20 shares from B. Now Acme Co has three shareholders, A at 100 shares, B at 80 shares, and C at 20 shares. You get the picture.
Historically, the idea behind a direct listing is that you save on fees, allow a market-based approach to finding a price, and avoid equity dilution. However, recently the SEC made a change to permit companies also to raise capital with direct listings. So, not only can individual investors sell shares – the company can do so as well.
SPACs
The third (and newest) option for companies that want to go public is the SPAC. With this option, an entity raises capital with the sole purpose of finding a company to acquire. A company that wants to go public can get in touch with one of these SPACs (given the competition, it’s also possible that a SPAC will want to meet with you) and negotiate everything upfront. Companies looking to go public can change the sponsor share percentage, the warrant coverage, and negotiated price. Companies can even negotiate who will be on the board post-merger.
Because there’s no IPO process but just a “merger” and the SPAC already has the capital raised, companies can negotiate all the essential details and ensure that they are getting the best financial deal by going public. Since the SPAC has already done much of the paperwork (the initial filing, etc.), this merger can also happen quickly. While the direct listing or traditional IPO process might take six months or more, a SPAC merger can complete in as little as 2-3 months.
SPACs are “all the rage” now because they’re fast, efficient, and relatively simple ways for companies to raise capital.
At Mack Capital, We Have Experience with All of These Options
At Mack Capital, we have experience in all of these forms of raising capital. Whether your company is looking to raise money via an IPO (either the traditional way or the direct method), or you’re looking to raise capital from a SPAC, our team of experts can help.
Contact us today, and let’s see how we can help take your company public!