Year of the SPACs?

Private companies often chose to go public, meaning that they become publicly-traded and owned. Though this can have disadvantages, entities get listed on an exchange (like NYSE) generally in order to raise funds, but additionally many may be primarily looking to increase brand awareness and/or strengthen their prestige.

There are more than one ways to go public and in this article we will explore the go-to way of an Initial Public Offering (IPO), as well as the trending Special Purpose Acquisition Company (SPAC) option and the Direct Listing.

Initial Public Offering (IPO)

This is considered the traditional way for a private company to go public, in which new shares are created and underwritten. Interested entities pick and work with underwriters – typically investment banks – to go through the registration procedures, determine the initial price of the share and distribute them.

Despite this being the most popular option, it is a lengthy, expensive and rigorous process in which the firms undergo a high level of scrutiny.

SPACs

Special Purpose Acquisition Companies (SPACs) are formed for the purpose of raising money through an initial public offering (IPO) in order to acquire an operating company.

In very broad terms, the SPAC gets listed via an IPO, finds another company to acquire and when that transaction is completed, a new publicly traded company is formed.

They are often called "blank check companies", as they don't have commercial operations nor a stated acquisition target and investors don't know which company the SPAC will eventually acquire.

This process tends to be faster than the "established" IPO option and probably offers more security and less scrutiny to the firm looking to go public. On the other hand, uncertainty is potentially high for those who invest in the SPACs and that's why these are often formed by high profile investors and industry veterans.

This method has been around for a long time, but has seen exponential rise over the last few years, partly due to increased market volatility of the COVID-19 era. According to Factset, there were 247 SPAC that went public in the US in 2020 compared to 55 in 2019. In Q1 2021 alone, the number of SPAC IPOs was 250, out of a total 365 IPOs.

Firms such as the EV maker Nikola Motor Company and the commercial spacecraft manufacturer Virgin Galactic are popular examples of companies who went public by merging with a SPAC.

Another EV company, Lucid Motors has recently announced that it will go public by merging with the Churchill Capital IV SPAC.

Direct Listing

Through this process, firms sell outstanding shares, with no issuance of new shares and without the involvement of underwriters or intermediaries.

This is usually preferred by entities who don't have the financial means to follow the traditional IPO route or don't want to create new shares, thus diluting existing ones.

On the other hand, we could say that this is probably a daring move, since in the absence of underwriters, there are no real guarantees that the shares will find buyers.

Perhaps the most famous company (and the first major one) to choose this method is Spotify, which went public in 2018, followed by Coinbase which begun trading publicly in April 2021.

Nikos Tzabouras

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and…

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