Consultations:
For the longest time, initial public offerings were the “go-to” choice in public offerings. Recently, however, startups have discovered a more manageable alternative to traditional IPOs by way of special purpose acquisition companies, or SPACs.
Here are four reasons why more private companies are electing to go with SPACs versus the IPO route.
1. A Quicker and More Streamlined Process
A key reason for the popularity of SPAC mergers is that the transaction is typically more streamlined than with an IPO. As a result, the startup company will have faster access to its cash. In contrast, the IPO process is typically long and drawn out and can take several months of dealing with investment banks before a company receives a penny from a sale. According to SoFi, a SPAC merger generally takes between four to six months, whereas a traditional IPO can take 12 to 18 months.
2. A Less Costly Transaction
According to KPMG Advisory Services, because a SPAC merger doesn’t need to generate interest from investors in public exchanges, marketing costs are much lower. With IPOs, there are additional costs incurred in the process, as investment bankers or underwriters must be hired to complete the merger. This process can cut into the startup company’s proceeds and the cost can range between 4% to 7%.
3. Greater Opportunity for Additional Capital
In addition to their original capital to fund the transaction, SPAC sponsors also raise debt or private investment in public equity funding to help generate growth for the combined company. According to KMPG Advisory Services, “This backstop debt and equity are intended to ensure a completed transaction, even if some SPAC investors redeem their shares.”
4. Less Exposure to Market Volatility
IPO valuations are subject to what the stock market is doing at the time of the listing. Thus, companies typically put off their IPO for significant periods when the market is volatile, waiting it out for more favorable market conditions. The pricing with a SPAC, however, allows the startup to negotiate pricing with the SPAC before the transaction closes — providing a greater advantage in a volatile market.
“Going through a SPAC takes out any reason to delay and means the startup can get the funds it needs in a timelier manner.” – Finance Monthly
It’s important to note that the popularity of SPACs may also increase litigation risks for directors and officers of these companies. If you are a SPAC in need of D&O insurance or would like to learn more about this vital coverage, contact the experts at Oakwood D&O. We have over 15 years of experience specializing in all aspects of management liability, with a focus on directors and officers.
Would you like a complimentary review of your current insurance policy? Let’s get in touch. Email Eli Solomon, CEO, at eli@oakwooddno.com or call 323-686-7519.
Are you a company or broker with a quality book of D&O business that you are planning to sell? Currently, Oakwood D&O is expanding its book and market reach by acquiring D&O business accounts. With proper due diligence and favorable agency terms, we can ensure a smooth transfer of business when you’re ready to move forward.
