How to Set Up and IPO a Special Purpose Acquisition Company

Setting up and launching an initial public offering (IPO) for a special purpose acquisition Company (SPAC) generally is much less involved than conducting a typical IPO. However, it still requires planning and execution. Organizers must first create the shell company and market it to investors. Then, when ready, they conduct an IPO, selling shares to raise capital to acquire an existing private company. Finally, they must identify a target company and complete the acquisition, converting the private target into a public company.

A financial advisor can help you set up and launch an IPO for a SPAC by guiding you through the financial structuring, regulatory requirements and investor relations.

How a SPAC Works

A SPAC, or blank-check company, is a shell-like company created by investors that initially has no products or operations. Its sole purpose is to raise capital through an IPO to eventually acquire an existing company. The SPAC process allows private companies to access public markets more quickly, cheaply and with less regulatory scrutiny than a traditional IPO.

The process for setting up a SPAC begins with its formation by a group of sponsors, typically experienced investors or industry experts. These sponsors provide the initial funding and management expertise needed to launch the SPAC.

Once formed, the SPAC goes public through its own IPO, raising funds from investors who are the sponsors will be able to identify and acquire a promising private company. At this stage, the SPAC has no commercial operations or assets other than the cash raised in the IPO.

After the IPO, the now cash-rich SPAC begins looking for a private company to merge with. This search period usually lasts up to two years, during which the SPAC’s management team evaluates potential acquisition targets.

Investors in the SPAC are typically given the opportunity to vote on the proposed acquisition, ensuring that the chosen target aligns with their expectations and investment goals. If the SPAC fails to complete a merger within the designated time frame, it must return the funds to its investors.

Once a suitable target is identified, the SPAC negotiates the terms of the merger. This process involves thorough due diligence to ensure that the target company is a viable candidate. Upon reaching an agreement, the SPAC and the target company merge, and the target company becomes a publicly traded entity. The newly public company can then use the capital raised by the SPAC to fuel its growth and expansion plans.

How to IPO a SPAC

A SPAC manager reviewing requirements for an IPO.

While SPACs escape much of the regulatory burden of a typical IPO, they still have significant requirements to fulfill. Once the SPAC is formed, it files a registration statement with the Securities and Exchange Commission (SEC). This document, typically a Form S-1, outlines the SPAC’s business model, management team, and the terms of the offering.

The registration statement is intended to provide potential investors with the information they need to make informed decisions and must be thorough, detailed and transparent. The SEC reviews this document to ensure compliance with regulatory requirements before the SPAC can proceed with the IPO.

After the SEC approves the registration statement, the SPAC enters the marketing phase. This involves a roadshow where the SPAC’s management team presents their vision and strategy to potential investors. The goal is to generate interest and secure commitments from institutional and retail investors. Effective marketing is critical, as it directly impacts the success of the IPO by determining the demand and pricing of the SPAC’s shares.

The next step is to price the IPO. The SPAC’s shares are typically priced at $10 each, but the final pricing can vary based on market conditions and investor demand. Once the pricing is set, the SPAC officially launches its IPO, and shares become available for trading on a public stock exchange. This step marks the transition from a private entity to a publicly traded company that has the cash to pursue an acquisition.

Key Differences: SPAC vs. Regular IPO

When companies decide to go public, they often compare going the SPAC route to conducting a regular IPO. Here are some of the differences:

Speed and efficiency: SPACs typically offer a faster route to going public than traditional IPOs. A regular IPO can take from six months to over a year due to regulatory requirements and market conditions. A SPAC merger, meanwhile, can be completed in a few months. This speed can be advantageous for companies looking to quickly access public markets.
Cost considerations: A SPAC can cost less than a regular IPO. Traditional IPOs often involve significant underwriting fees and marketing expenses, whereas SPACs may reduce these costs by eliminating the need for extensive roadshows and underwriter commissions. SPACs may still include other costs, such as sponsor fees, that companies should consider.
Market conditions: SPACs can provide more certainty in volatile markets. In a traditional IPO, companies are subject to market fluctuations that can affect their valuation and timing. SPACs, on the other hand, lock in a valuation through a merger agreement, offering more predictability in uncertain markets.
Regulatory scrutiny: Regular IPOs undergo rigorous regulatory scrutiny, including detailed financial disclosures and compliance with SEC regulations. SPACs, while still subject to regulatory oversight, may face less initial scrutiny, as the SPAC itself is a shell company with no operations until it merges with a target company.

Bottom Line

An investor researching how to invest in a SPAC.

Launching an IPO for a SPAC begins with forming the SPAC, which involves assembling a skilled management team and securing initial funding through private investments. The IPO process for a SPAC is similar to but usually faster than traditional IPOs. Still, it can take months and require complying with a number of regulatory disclosures, as well as conducting marketing to attract investors in the IPO. After the IPO, the SPAC typically has up to two years to identify and merge with a target company.

Tips for Investing

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