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A SPAC (especially when combined with a PIPE [Private Investment in Public Equity], as they usually are), offers the business more certainty about the amount of

A SPAC (especially when combined with a PIPE [Private Investment in Public Equity], as they usually are), offers the business more certainty about the amount of money they're going to get. The business can negotiate ahead of time and then either accept or reject the deal. (The amount of money is more or less fixed, but the business can negotiate how much of itself it sells for that fixed amount of money.) In a traditional IPO, there is a set number of shares to sell. The bank suggests a price range, then gets orders from investors for how many shares they'll buy at different prices, adjusting the range as they go, if necessary. Then the bank picks a price that will sell all of the shares. The business doesn't really have a lot of say in the amount of money they end up raising. Additionally, there is some theory that a SPAC merger can offer projections of future business without opening themselves to liability if the projections don't come true. Whereas that's very clearly not the case with an IPO. Pre-revenue business in particular like that about SPACs. The SEC seems to be against that interpretation of the law, though. The other thing about a SPAC is that it brings in additional management that, presumably, have more experience with public markets. Some businesses see that as a benefit. The major downside of a SPAC, from the busines's perspective, is that the SPAC sponsor takes a huge cut of the proceeds. That is, of course, a big upside for the sponsor, and probably the main reason we've seen so many SPACs crop up recently.

bee_rider 4y ago
I appreciate the comment, especially given that the general environment is pretty hostile to SPACs. This answers the question of why a company might want to use a SPAC for something other than, basically, evasion of regulations/reporting (which seems to be the main theory here). Is there any reason to think they might be good for the market in general (other than, sort of, 'what is good for businesses is good for the market' type thinking? (this is why I brought up the HFT example)).
- nfriedly 4y ago
  Oh, yeah. The "good for the little guy" argument is that essentially anyone can buy into a SPAC before the merger goes through, whereas with an IPO, the bank only takes orders from big investors. Little guys have to then buy from one of those big investors, usually at higher price. SPACs typically trade at around $10 per share before the merger is announced, and most PIPE deals get the same price. So everyone is on equal footing at the start. After the merger is announced, the share price tends to rise, so little guys that get in late pay more. But they at least had the opportunity to go in at the same price as the big investors. So, from that perspective, it is more egalitarian.

bee_rider 4y ago

I appreciate the comment, especially given that the general environment is pretty hostile to SPACs. This answers the question of why a company might want to use a SPAC for something other than, basically, evasion of regulations/reporting (which seems to be the main theory here). Is there any reason to think they might be good for the market in general (other than, sort of, 'what is good for businesses is good for the market' type thinking? (this is why I brought up the HFT example)).

nfriedly 4y ago
Oh, yeah. The "good for the little guy" argument is that essentially anyone can buy into a SPAC before the merger goes through, whereas with an IPO, the bank only takes orders from big investors. Little guys have to then buy from one of those big investors, usually at higher price. SPACs typically trade at around $10 per share before the merger is announced, and most PIPE deals get the same price. So everyone is on equal footing at the start. After the merger is announced, the share price tends to rise, so little guys that get in late pay more. But they at least had the opportunity to go in at the same price as the big investors. So, from that perspective, it is more egalitarian.