What is a SPAC, and how does it work?
Special Purpose Acquisition Companies (SPACs) have managed to attract a lot of attention from many companies, business owners, and organizations that want to go public. Nowadays, SPACs are largely believed to be a reliable and efficient alternative to the traditional initial public offering (IPO).
However, choosing between an IPO or SPAC can still be challenging if you are not fully familiar with the basics of a SPAC and how it works. In this regard, professional pre-IPO advisory services can assist companies in determining whether they are ready to go public.
What is a SPAC?
A SPAC is basically a shell company created by investors with the sole intention of obtaining capital via an IPO in order to later purchase another business.
A SPAC does not produce any goods and does not engage in any economic activity. In actuality, the SPAC’s sole resources are often the funds acquired via its own IPO. A group of institutional investors often establishes or sponsors a SPAC.
Why are SPACs becoming popular?
There are a few reasons behind the current surge in popularity of SPACs.
For starters, private businesses have remained private for longer. Due to wealthy investors like SoftBank and Tiger Global Management, who distribute $100M+ rounds, delaying IPOs while increasing the availability of late-stage private firms, many VC-backed companies have had easy access to funding.
Moreover, SPACs have become a more convenient route to the public markets, especially when the circumstances for a mature company’s launch are favorable.
The Covid-19 epidemic has also caused market concern. Private enterprises have needed access to funding throughout the epidemic but have been less certain they would be able to raise significant amounts in the near future. For liquidity, some have gone to the open markets.
The typical IPO, however, could be less appealing given the volatility of public markets since companies have less control over how much money they can raise. The standard IPO also takes years to execute.
Therefore, some businesses are looking at quicker options to go public. Therefore, sponsors and investors are using this chance to offer companies an extra choice, at a higher cost.
Audit firms in Singapore help organizations deal with such uncertainties. Their pre-IPO advisory experts thoroughly analyze your business to determine whether it is ready to go public by forming a SPAC.
Working of SPACs
The following are the key features of SPACs and how they work.
The share price of the company is uncertain in a normal IPO. Along with the company’s underlying business value, it is influenced by market dynamics, investor demand, and investor appetite.
Even though the IPO process takes months, a company doesn’t know how much money it will generate until the day of the IPO.
Additionally, the IPO bankers, who estimate the company’s value in the view of investors, set the typical IPO price. The IPO can be overpriced since nothing is ever perfect. A SPAC transaction is desirable since it completely eliminates pricing uncertainty.
However, a new development has alarmed the market: SPACs are seeing steadily higher rates of share redemption, in which institutional investors withdraw funds from transactions before the merger is complete.
The typical IPO process might take years to complete. The target company’s SPAC merger procedure may be completed in as little as 3 to 4 months. For businesses trying to obtain capital and swiftly go public, this is appealing.
Despite having to fulfill all the same filing standards as a conventional IPO, the time constraint means the company must be ready to go public significantly faster.
This covers financial reporting, supervision by tax authorities, tax preparation, technological advancements, cybersecurity precautions and more. The process becomes efficient and quicker with the help of audit firms in Singapore.
The strategic SPAC has evolved into a standard pitch for certain IT businesses that want to go public quickly, even though not every SPAC intends to be a strategic partner to the company it takes public.
Strategic SPACs market sponsor expertise and experience to prospective businesses. For instance, if the sponsor is a group of EV investors or operators, an electric vehicle company may find a SPAC offering more interesting, particularly if the sponsor intends to join the board and collaborate with the management team on post-IPO strategy.
In this approach, the strategic SPAC fulfills a similar function to venture capital for private investment: the company gains from both the investment and the investor, in addition to the investment itself.
These characteristics of SPACs show why they have become popular all over the world and are attracting a significant amount of investment from investors and businesses. Ultimately, using a SPAC to go public is a reliable and quicker alternative to the traditional IPO.
If you are still confused about these processes, contact a professional audit firm in Singapore for pre-IPO advisory services and make smart decisions throughout these procedures.