Structure and Process
A traditional IPO is a meticulously regulated, multi-stage process managed by investment banks. A company begins by selecting an underwriting syndicate. These banks conduct extensive due diligence, helping the company prepare a registration statement, known as an S-1, for the Securities and Exchange Commission (SEC). The S-1 is a comprehensive document detailing the company’s business model, financials, risk factors, and planned use of proceeds. The SEC reviews this filing in a confidential process, providing comments and requiring revisions until the statement is deemed effective. Concurrently, the underwriters and company management embark on a “roadshow,” a series of presentations to institutional investors like pension funds and mutual funds to gauge demand and market the offering. Based on this feedback, the underwriters set an initial price range and then a final offer price. On the day of the IPO, shares are sold to these institutional investors at the offer price, and trading begins on a public exchange like the NYSE or NASDAQ. The company receives the capital raised, minus substantial underwriting fees, and is now subject to ongoing public reporting requirements.
A SPAC, or Special Purpose Acquisition Company, inverts this sequence. It is a “blank-check” shell company with no commercial operations, created solely to raise capital through its own IPO with the purpose of acquiring or merging with a private company. The SPAC IPO process is comparatively streamlined. The sponsors, often seasoned investors or industry experts, form the SPAC and file a registration statement, but the focus is on the sponsors’ track record and the strategy for identifying a target, as there are no historical financials to audit. Once the SEC declares the registration effective, the SPAC raises capital from public investors by selling units (typically shares and warrants) at a standard price, usually $10 per unit. This capital is held in a trust account, earning interest, while the sponsors have a predefined period, generally 18 to 24 months, to find a suitable private company for a merger. If no deal is completed within the timeframe, the SPAC is liquidated, and the funds in trust are returned to investors.
The defining event for a SPAC is the De-SPAC transaction. Once a target company is identified and a deal is negotiated, the SPAC submits a proxy statement/prospectus to the SEC for review. This document outlines the terms of the merger and provides detailed information about the target company, effectively serving as its public debut prospectus. A key feature of the SPAC structure is the redemption right granted to its initial public shareholders. Before the merger is finalized, shareholders can vote on the deal and, if they disapprove, they can redeem their shares for their pro-rata portion of the cash held in the trust account, plus accrued interest. To complete the merger, the SPAC must also secure additional financing, often through a Private Investment in Public Equity (PIPE) transaction, where institutional investors commit capital at a fixed price, providing a vote of confidence and necessary funds for the combined entity. Upon completion, the private company becomes a publicly listed entity, inheriting the SPAC’s stock ticker.
Speed and Certainty
The timeline is a primary differentiator. The conventional IPO is notoriously lengthy and unpredictable. The entire process, from initial preparation with bankers to the first day of trading, can consume six to twelve months or more. The timeline is heavily influenced by SEC review cycles, market conditions, and investor appetite. A company can be fully prepared only to postpone its IPO indefinitely due to a volatile market, creating significant uncertainty. The final offering price and the amount of capital raised are not known until the night before the stock begins trading, adding a final layer of unpredictability.
The SPAC pathway is often marketed as a faster and more certain route to becoming a public company. The initial SPAC IPO is relatively quick, taking a few months. The subsequent search for a target and the De-SPAC transaction then typically takes another six to nine months. While the total time from SPAC formation to a merged public company can be comparable to an IPO, for the target company, the process is condensed. Once a SPAC has been identified as a merger partner, the target is engaging in a negotiated merger with a known entity and a pre-raised pool of capital. This provides greater certainty on the valuation and the amount of capital that will be received upon closing, as these terms are agreed upon in the merger agreement. The PIPE investment, secured before the deal closes, further de-risks the capital raise. However, this certainty is contingent on the SPAC shareholders approving the deal and not redeeming a majority of the funds.
Costs and Economics
The cost structures of these two paths differ significantly. In a traditional IPO, the primary cost is the underwriting discount, typically 5% to 7% of the gross proceeds. This fee is paid to the investment banks for their services in underwriting, marketing, and distributing the shares. Additional expenses include legal, accounting, and exchange listing fees, which can total several million dollars. These costs are direct and transparent, deducted from the proceeds the company receives.
The economics of a SPAC are more complex and can be substantially more dilutive to the target company’s shareholders. The structure incorporates several layers of cost. First, the underwriters of the SPAC IPO receive a fee, usually 5.5% of the proceeds, with a portion paid upfront and the remainder deferred until a successful merger. Second, and most significantly, the SPAC sponsors receive a “promote,” typically 20% of the equity in the SPAC for a nominal investment. This promote is a major source of dilution, as it effectively transfers ownership from public shareholders (and, post-merger, the target company’s shareholders) to the sponsors without a commensurate capital contribution. Third, there are the costs of the De-SPAC process itself: legal, advisory, and PIPE placement agent fees. When combined, the total dilution from fees and the sponsor promote can easily reach 15% to 25% or more of the post-merger entity, a figure that often exceeds the underwriting fees of a traditional IPO.
Regulatory and Disclosure Landscape
The regulatory frameworks for IPOs and SPACs have historically differed, though they are converging. The traditional IPO process is governed by a principle of strict liability under the Securities Act of 1933 for material misstatements or omissions in the S-1 registration statement. This means the company, its executives, and its underwriters can be held liable for inaccuracies. The entire process is designed to be a comprehensive and heavily vetted disclosure event, with the SEC providing detailed comments to ensure all material information is available to investors before they commit capital.
SPACs have operated, until recently, in a more nuanced regulatory environment. The initial SPAC IPO, being a shell company, is a straightforward filing. The critical disclosure document is the proxy/prospectus filed for the De-SPAC transaction. While this document is subject to SEC review, a key legal feature was the availability of the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward-looking statements. This safe harbor, which protects companies from liability for projections made in good faith, does not apply to traditional IPO prospectuses. This allowed SPACs and their target companies to publish ambitious financial projections to market the deal, a practice forbidden in a conventional IPO. However, in March 2024, the SEC adopted new rules that significantly heighten the regulatory alignment between SPACs and IPOs. These new rules enhance disclosures in De-SPAC transactions, particularly regarding conflicts of interest, sponsor compensation, and dilution. Crucially, the rules clarify that, in certain circumstances, the target company may be considered a “co-registrant” and thus assumes liability for the proxy/prospectus statements, effectively diminishing the perceived liability advantages of the SPAC route.
Investor Protections and Market Perception
The mechanisms for investor protection are fundamentally different. In an IPO, the price discovery process is a core protective feature. The book-building process during the roadshow allows underwriters to gather non-binding indications of interest from sophisticated institutional investors, helping to set a market-clearing price. This process, while imperfect, is designed to ensure the company is not significantly overvalued or undervalued at the onset of public trading.
In a SPAC, the primary protection for public investors is the redemption right. This allows shareholders to get their initial investment back if they do not support the proposed merger. This feature protects against capital loss from a bad deal but does not protect against opportunity cost or dilution. The market perception of SPACs has been volatile. During the boom of 2020-2021, they were hailed as an innovative and disruptive force. However, post-boom, many De-SPACed companies have underperformed, with high redemption rates, significant stock price declines, and, in some cases, bankruptcies. This has led to increased scrutiny from regulators and a more skeptical view from the broader market. The traditional IPO, despite its flaws, retains a reputation for rigor and prestige, often associated with companies that have a long track record of operational performance and are deemed “IPO-ready” by their underwriters. A successful IPO is often seen as a stamp of approval from the financial establishment, whereas a SPAC merger can sometimes carry a stigma of being a backdoor for companies that may not yet be suited for the public markets’ scrutiny.
