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What is a SPAC and How Does it Differ from an IPO?

A Special Purpose Acquisition Company (SPAC) is a company that raises money from investors to buy another company within an agreed-upon time period. IPOs and SPACs are similar in that they both offer investors shares of ownership in the newly formed corporation. They both allow investors to share in any returns from the investment. However, there are some key differences between the two securities. That being said, find out what they are and conduct due diligence before investing in either of them.

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What is a Special Purpose Acquisition Company?

A SPAC is a company created to buy other companies with its own cash, not money provided by investors. Finance professionals, traders, and investors call them this because there is one goal in mind. The idea behind a SPAC is that it will raise enough cash to execute its plan. That means attempting to complete acquisitions, then either eventually go public or else cease operations. The process for setting up a SPAC differs depending on where you live. However, most cases follow similar procedures as those for IPOs.

What Are Some Differences Between an IPO and a SPAC?

Unlike a traditional IPO, a SPAC IPO may take significantly less time. Their financial statements, included in the IPO registration statement, are typically much shorter and the company and audit firms can compile them in weeks. On the flip side, non-SPACs will need significantly longer time. Simply put, there are no financial data to share nor any mention of the company’s assets, business risks are minimal.

Hence, the SEC’s comments are few and not typically troublesome. If the company decides to go ahead with a SPAC IPO, it can complete the entire IPO process within just eight weeks. In contrast, the De-SPAC has requirements that are comparable to those of an IPO. This includes audited financial statements and other disclosure requirements, which do not apply to the acquisition of the target by a public operating company. The greenshoe or just the shoe option typically extends for 30 days in a traditional IPO. On the other hand, the over-allotment option in a SPAC IPO typically extends for 45 days. Either way, both size upgrades are 15% of the base offering.

One Major Difference

One striking difference of SPAC IPOs is their unusually structured underwriting discount. In a typical IPO, the underwriters usually receive a discount of 5%-7% of the gross IPO proceeds. And they withhold that portion from the proceeds that are delivered at closing. Under a SPAC IPO, the typical discount structure involves a 2% advance payment at the closing of the IPO. Additionally, another 3.5% on the closing of the De-SPAC transaction. If no De-SPAC transaction occurs, the deferred 3.5% discount is never paid to the underwriters. Instead, it’s redirected to use the funds with the remainder of the trust account balance to redeem the public shares.

In a traditional IPO, directors and officers of the sponsor are forbidden from selling their stock for 180 days after the pricing of the IPO. In a De-SPAC IPO, however, directors and officers can only sell their stock when certain requirements are met – typically once the common shares trade at $12.00 per share for 20 out of 30 consecutive trading days.

What’s Next For SPACs?

SPACs were brought to light in 2021, with so many of them taking off to new heights. Consequently, that’s attracted attention from the SEC. For those who wish to trade these securities or believe they were harmed financially by SPAC or promoters, it’s important to stay up to date on the SPAC space here.

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