Thought Leadership  •  May 03, 2021

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What is a Special Purpose Acquisition Company?

Special purpose acquisition companies (SPACs) offer an alternative path to the IPO when taking a company public. Below, we’ll answer the question, “What is a special purpose entity?” along with covering the SPAC process and why more business leaders are choosing this option when taking their companies public in the present market.

SPAC Defined

A SPAC is formed expressly for the purpose of taking a company public. The SPAC has no commercial business purpose of its own. It's simply a vehicle for raising money on behalf of a company that wishes to go public but does not want to have its own IPO (initial public offering). If the SPAC appears similar to a shell company, it is: Its only purpose is to purchase another business (sometimes more than one).

The SPAC definition does not really explain the process, nor why a company might choose a SPAC instead of an IPO to go public. SPACs are typically formed by investors that want to make deals in a specific market sector, such as technology. While the investors are generally experienced deal-makers within the technology sector, they form a SPAC from a desire to make money rather than support a specific company with a direct investment. The SPAC's investors will then raise money with intent to buy one or more companies within the next two years. If the SPAC doesn't buy any companies within two years, the money can be returned to those that contributed.

Businesses that want to go public can market themselves to SPACs operating within their industry. If a match is made, the SPAC will acquire a business it hopes will return profits and the company that was acquired will be publicly traded.

What Are the Benefits of SPAC for a Public Company?

SPACs have nearly tripled in number from 2017 to present date. As of September 2020, there were 95 SPACs with valuations of $35 billion.

While SPACs are clearly growing in popularity, you might wonder why so many companies are choosing this route to become public. Reasons that SPACs are growing in popularity include:

  • Growing interest from banks and investment institutions in investing in SPACs
  • Higher-tier companies are choosing SPACs, lending them legitimacy
  • Its faster, streamlined process is attractive to business owners who don't want to wait
  • As investors realize that SPACs deliver a high return on investment, more are willing to invest
  • More businesses and investors are aware of SPACs and their benefits — thus, more want to take part
  • SPACs can be seen as safer than IPOs in a mixed economy
  • Famous investors are now taking part, which adds to the cachet of SPACs

SPACs are not better than IPOs or vice versa; they are different. By understanding the advantages of a SPAC, you can decide whether a SPAC or IPO is a better option for your business. Benefits of choosing a SPAC to go public include:

  • SPAC investors tend to be experienced: No investor makes his or her first deal a SPAC deal, which means the investors contributing to a SPAC have demonstrated sector experience. Some business owners are attracted to the greater level of expertise this brings to the deal process.
  • The process is faster: IPOs are time-intensive — companies need to disclose significant financial information and aggressively market themselves to investors via a lengthy road show process. With a SPAC, financial disclosures are reduced because there is no upfront target. Given the same outcome with less hurdles to jump through, it's no wonder some companies select the SPAC instead of the IPO.
  • Option to arrange forward purchase commitments: Currently, some SPACs come with a forward purchase commitment in which investors agree to put in more money at a later date, when certain conditions are met. Business owners find the built-in commitment for additional financing attractive.
  • Buffer from market volatility: Companies that sell to a SPAC are somewhat protected from the market volatility that makes IPOs so dramatic. In a market that is experiencing frequent swings, business leaders may feel that a SPAC delivers better value than an IPO, where valuation may be lower than desired due to the frequently changing investment climate.

Given the difficult headwinds faced by many companies in the present environment, SPACs are newly popular — they offer a viable way to go public now, rather than wait six months and have an IPO derailed by volatility.

DFIN Offers SPAC Process Resources

While SPACs have fewer financial disclosure requirements than IPOs, companies still have to do due diligence and file reports after acquisition. DFIN offers robust resources to help companies with the due diligence and post-acquisition reporting requirements.

One of our most popular integration tools is ActiveDisclosure, which is designed for financial reporting and mandated SEC filings. ActiveDisclosure is designed for use by teams and includes built-in workflows that support collaboration.

The ability to link all financial data from a single source better ensures accuracy in reporting — make one change at the source and the numbers will update across the board. When it's time to file, a secure architecture protects sensitive financial data throughout the EDGAR transmissions process.

Not only does DFIN offer best-in-class software to help with all aspects of deal-making, there's 24/7/365 regional support in your local area whenever it's needed. Take your company public and meet all reporting requirements with help from a trusted industry leader.

craig clay

Craig Clay

President of Global Capital Markets