Decoded: The Alternatives To A Traditional IPO

By | November 22, 2021

With a rush of IPOs making the news recently, let’s take a look at a few other options a company may consider to go public. Buckle up as we break down SPACs and direct listings for you.

Although an initial public offering (IPO) is still the go-to choice for many, the extensive process before undergoing an IPO isn’t really a walk in the park. IPO involves complex regulatory filings and months of negotiations with underwriters and regulators. This can dissuade a company’s plans to become publicly listed, leaving them in deep water, especially during uncertain times like the ongoing pandemic. This transition is a demanding process and involves a lot of expenditure on the issuing company’s behalf.

Well, it’s not the easiest! Challenged with the limitations of an IPO, some companies are exploring alternative paths to go public – special purpose acquisition companies (SPACs) and direct listings.

Additional Reading: What Is An IPO? How Can You Invest In One? 

What are Special Purpose Acquisition Companies (SPACs)?

Of late, the idea of Special Purpose Acquisition Company or SPAC has become very prevalent in India’s evolving business landscape. A special purpose acquisition company (SPAC) is a company that has zero commercial transactions, developed with the sole purpose of raising capital through an initial public offering (IPO) to inevitably acquire or merge with an existing company. They are also known as “blank check companies” since the target company is unknown at the time of the IPO.

Simply put, a special purpose acquisition company (SPAC) is formed to raise money through an initial public offering (IPO) to buy another company. Investors in SPACs can range from reputable private equity funds and public personalities to the general public.

Additional Reading: Should You Use A Personal Loan To Invest In The Stock Market?

How is SPAC better?

Even though the global interest for SPACs has increased considerably, it is yet to find a solid foothold in India. The trademark feature of a SPAC is its efficiency. It is comparatively inexpensive and easy to take a SPAC public – not so much the case with IPOs. According to a study, investment banks can charge fees of up to 7%  of gross IPO proceeds.

With SPAC, there are no operations, debt, liabilities, and assets, including very few regulatory steps compared to an IPO process. This implies that the SPAC can go from formation to public in as little as a few months – significantly lower than the many months or even years taken to bring a company through an IPO process.

Even though the COVID situation cast a dense cloud on many IPO plans, SPACs kept going public. With SPAC, the advantage is that it’s less susceptible to the ups and downs of the market. In any case, we still need to factor in the opportunities it presents for retail investors to earn a stake in a nascent, new company, not just for accredited/sophisticated investors.

What is a direct listing?

With a direct listing process (DLP), the issuing company goes public and sells shares without the involvement of any intermediaries or underwriters.

The fascination with DLP is the lower cost and higher control over setting the stock price. Direct listings are largely profitable for businesses that already have a strong follower base and may not need to drum up additional support.

How is direct listing better?

In a direct listing, a private company goes public via selling shares to investors on the stock exchanges without an IPO. Direct listings remove the obligation for an IPO roadshow or IPO underwriter, saving both time and money. Globally, budget-conscious small businesses opt for direct listing in order to avoid the large expenses associated with conventional IPOs.

Furthermore, direct listings allow shareholders to sell their stake in the company – the minute it goes public, without any holding period normally associated with an IPO. Certainly, this also benefits the company by avoiding the dilution that issuing new shares might cause.

On April 3, 2018, Spotify, an audio streaming and media services provider, went public using a direct listing. Harvard Law School Forum did a case study  on Spotify’s direct listing about Corporate Governance and Financial Regulation. Spotify chose a direct listing over an IPO as it offered greater liquidity, allowed shareholders to sell shares directly to the public, and allowed transparency with market-driven price discovery, among other reasons.

With SPAC, a reverse merger might allow a company to potentially hide any liabilities and weaknesses from the market. Case in point – the recent history of WeWork. WeWork became one of the most renowned private companies to have raised money from venture capitalists, among others. However, once the disclosure process involved with an IPO began, the company’s weaknesses and vulnerabilities became quite evident. If WeWork had decided to go public through a SPAC, these details wouldn’t have come to light.

In closing, in the Indian business landscape, there is a meaningful space for both SPACs and direct listings, but they must be done safely to ensure investors have protection both before and after going public.

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