Structure and Process
A Traditional IPO is a meticulously regulated, multi-stage process managed by an investment bank acting as an underwriter. A company begins by selecting underwriters through a “bake-off.” These banks then conduct extensive due diligence, auditing the company’s financials, operations, and legal standing to prepare the registration statement, known as the S-1 filing, which is submitted to the Securities and Exchange Commission (SEC). The S-1 is a comprehensive public document detailing the company’s business model, risk factors, financial performance, and intended use of proceeds. The SEC reviews this filing in a series of comments and revisions, a process that can take several months. Once the SEC declares the registration statement effective, the company and its underwriters embark on a roadshow. This involves presentations to institutional investors like pension funds and mutual funds to gauge demand and set an initial price range, and later a final offering price. On IPO day, the company issues new shares directly to public investors, and the capital raised, minus underwriting fees, goes onto the company’s balance sheet.
In stark contrast, a Special Purpose Acquisition Company (SPAC) is not an operating company but a “blank check” shell corporation with no commercial operations. Its sole purpose is to raise capital through its own IPO to acquire or merge with a private company, thereby taking that company public. This process is bifurcated. First, the SPAC itself goes public. This is a far simpler IPO because the SPAC has no business operations or historical financials to disclose. Its filing, while still reviewed by the SEC, is more straightforward. The SPAC IPO raises capital from public investors who purchase “units,” typically consisting of one share and a fraction of a warrant. The proceeds are placed entirely in a trust account, earning interest, while the SPAC’s sponsors (the management team) have a limited timeframe, usually 18-24 months, to find a suitable private company to merge with. This merger is called a “de-SPAC” transaction.
The second phase is the de-SPAC. Here, the SPAC identifies a target company. The two entities negotiate a merger valuation. Crucially, this deal is presented to the SPAC’s public shareholders, who have the right to vote on the transaction. Furthermore, they have a redemption right, allowing them to reclaim their initial investment plus accrued interest from the trust account if they disapprove of the deal. The de-SPAC process requires a separate proxy statement (S-4 filing) approved by the SEC, which contains detailed information about the target company, similar to a traditional IPO S-1. The merger is consummated once shareholder approval is secured, and the combined entity begins trading on a public exchange under a new ticker symbol.
Speed and Certainty
The timelines for these two paths diverge significantly. A traditional IPO is notoriously lengthy and unpredictable. The entire process, from initial preparation with underwriters to the first day of trading, routinely takes anywhere from six months to over a year. The timeline is heavily dependent on the SEC review process, market conditions, and investor appetite. A company can be weeks away from its pricing date and suddenly postpone due to market volatility, leaving it in a state of limbo with substantial sunk costs. The final valuation and amount of capital raised are not known until the night before the stock begins trading, immediately after the roadshow concludes. This creates significant uncertainty for the company.
A SPAC merger is widely marketed as a faster alternative. While the entire journey from a private company’s perspective—engaging with a SPAC, negotiating, and completing the de-SPAC—can still take 6-9 months, it can bypass the unpredictable SEC review timeline of a traditional IPO. The primary driver of speed is the existence of a pre-negotiated merger with a single counterparty (the SPAC) rather than a broad marketing effort to thousands of institutional investors. Furthermore, the amount of capital available from the SPAC’s trust is known from the outset, providing greater certainty of proceeds. However, this certainty can be undermined by shareholder redemptions. If a large percentage of SPAC shareholders redeem their shares, the target company may receive significantly less cash than anticipated unless a concurrent PIPE investment (Private Investment in Public Equity) is arranged to backstop the deal.
Costs and Economics
The fee structures between these two methods are complex and differ substantially. In a traditional IPO, the primary cost is the underwriting discount, typically 5-7% of the gross proceeds. This fee is paid to the investment banks for their services in underwriting the risk, marketing the deal, and stabilizing the stock in the aftermarket. There are also additional expenses for legal counsel, auditors, exchange fees, and marketing, which can be substantial but are dwarfed by the underwriting fee.
The economics of a SPAC are layered. First, the SPAC pays underwriters a fee for its own IPO, usually 5.5% of the proceeds. The more significant cost comes during the de-SPAC transaction. The SPAC sponsors typically receive a “promote,” usually 20% of the SPAC’s equity, for a nominal price. This promote dilutes the ownership of both the pre-IPO SPAC shareholders and the target company’s shareholders upon merger. Additionally, sponsors may also pay a fee to the underwriters upon the successful completion of the de-SPAC merger, often around 3.5% of the trust value. Legal, banking advisory fees, and PIPE placement agent fees for the de-SPAC process are also considerable. While a company going public via SPAC may not pay a direct underwriting fee like in an IPO, the dilution from the sponsor promote often represents a far greater implicit cost, sometimes equivalent to a fee of 15-20% or more.
Valuation and Investor Dynamics
Valuation discovery is a fundamental difference. In a traditional IPO, the valuation is determined through a structured market-driven process. During the roadshow, underwriters solicit indications of interest from institutional investors, building a book of demand at various prices. The final IPO price is set based on this feedback, reflecting broad market sentiment and perceived value immediately before the company begins trading. This process is designed to find the market-clearing price.
In a de-SPAC transaction, valuation is negotiated bilaterally between the SPAC sponsors and the target company’s leadership and shareholders. It is a privately agreed-upon price rather than one tested in the open market. Proponents argue this allows for more nuanced storytelling and a guaranteed valuation. Critics contend it lacks the rigorous price discovery of an IPO and can lead to valuations that are not supported by public market investors, which often becomes apparent post-merger through poor stock performance or high redemption rates. The investors also differ. A traditional IPO is marketed primarily to long-only institutional investors. A SPAC IPO initially attracts a different cohort, including hedge funds and arbitrageurs who may be more interested in the risk-free return from the trust account or the warrant value than the long-term prospects of a future merger target.
Regulatory Scrutiny and Liability
Both processes are regulated by the SEC, but the nature of the liability for disclosures is a critical distinction. In a traditional IPO, the company and its underwriters are subject to strict liability under Section 11 of the Securities Act of 1933 for any material misstatements or omissions in the S-1 registration statement. This means investors can sue for losses without having to prove intent or negligence, placing a heavy burden on the company and its bankers to ensure absolute accuracy.
For much of the SPAC’s life cycle, it was perceived to offer a liability advantage due to different legal standards applied to the de-SPAC transaction. It was often treated as a merger under state corporate law rather than a securities offering, potentially subjecting disclosures to a more forgiving standard of liability (negligence rather than strict liability). However, this landscape changed dramatically in January 2024 when new SEC rules on SPACs took effect. The new rules enhance disclosures in SPAC IPOs and de-SPAC transactions. Crucially, they align the legal standard for liability in de-SPAC transactions more closely with that of traditional IPOs. The SEC now explicitly states that the target company is a “co-registrant” when the SPAC files its S-4 proxy statement, meaning the target company’s signing officers assume direct liability for the accuracy of the disclosures, effectively eliminating any significant liability safe harbor previously associated with the SPAC process.
Flexibility and Forward-Looking Statements
A notable advantage of the de-SPAC process was its allowance for the use of projections and forward-looking statements. Traditional IPO rules are restrictive; while companies can discuss future opportunities, they cannot include explicit financial projections in their S-1 filing due to the high liability standard. The de-SPAC process, being structured as a merger, allowed sponsors and target companies to present detailed, multi-year financial projections to shareholders to justify the valuation of the merger. This provided a platform for younger, high-growth companies with limited historical financials to tell their growth story more effectively. While this remains a feature, the new 2024 SEC rules have heightened the scrutiny on these projections, requiring them to be presented with greater clarity and a reasonable basis, and they are now subject to increased liability, blurring this distinction.
