Ways to take your company public: SPAC, IPO, and Direct listing

The lives of companies begin in the private market, but when they want to raise capital, provide liquidity for shareholders, maximize their value, increase visibility and credibility, and enable acquisition and merger, they may consider going public.

An initial public offering (IPO) is the process by which a private company issues stock on the public market for the first time. This allows retail investors to buy shares in the company and generates funds for the business. Going public through an IPO also entails a transition from private to public status.

Different IPOs: Typical ways of going public

In the United States, private companies have several options to go public, including traditional IPOs, direct listings, and special purpose acquisition companies (SPACs).

1. Traditional IPO:

The traditional IPO is the most common method for taking a private company public. In this process, the company issues new shares of stock to the public through an underwriter who facilitates the pricing and selling of the shares to investors.

To be eligible for an IPO, the company may need to meet certain requirements such as a certain amount of revenue or assets. The timeline for an IPO can take several months or even up to a year. The costs associated with an IPO can be high, as the company is required to pay underwriting fees to the investment banks (ranging from 2-7% of the total amount raised), legal fees, accounting fees, and other expenses. The total cost of an IPO can range from $500,000 to $5 million or more.

Companies typically choose to use an IPO when they need to raise capital to finance growth or pay off debt.

Numbers of US Annual IPOs(2013-2022)

Data resources:

2. Direct Listing:

In a direct listing, a company goes public without issuing new shares or using an underwriter. Instead, existing shares are sold directly to the public. 

This method of going public is more inexpensive and efficient than an IPO but requires a company to have an established public market for its shares. However, there is more initial volatility as the availability of the stock and price depend solely on supply and demand, especially from existing shareholders. The total cost of a direct listing can range from $250,000 to $1 million or more.Direct listings are typically used by companies that do not need to raise capital through an IPO or that want to avoid the high costs of underwriting fees. However, companies using direct listings may still be able to raise capital from the public by selling existing shares.

3.Special Purpose Acquisition Company (SPAC):

A SPAC is a shell company that raises money from investors through an IPO to acquire an existing private company. Once a SPAC has raised enough money, it uses those funds to purchase the private company, taking it public in the process. 

Compared to IPOs and direct listings, this method is more cost-saving and time-saving. The total cost of a SPAC merger can range from $5 million to $50 million or more, and it typically takes 3 to 6 months for a SPAC company to complete the entire transaction and merge with the target company to form a new public company. SPACs can also offer more certainty around the pricing and demand for the shares.

SPACs may be well-suited for disruptive or emerging technology companies, companies with complex financials, companies seeking a faster time to market, and companies seeking greater control over the process.

Factors to Consider in choosing the Best Method:

When a company is considering going public, there are several important factors to consider when choosing the best method:

1. Capital Needs: If the company needs to raise a significant amount of capital, an IPO or SPAC may be a better choice than a direct listing. Both IPOs and SPACs offer the opportunity to raise a substantial amount of capital from investors.
2. Cost: Direct listings are typically cheaper than IPOs or SPACs, but they may not provide the same level of liquidity or visibility to the company. IPOs and SPACs can be more expensive due to the higher costs associated with underwriting fees, legal and accounting fees, and other expenses.
3. Timeline: IPOs and SPACs can take several months to complete, while a direct listing can be done more quickly. This may be a critical factor if the company needs to go public rapidly to capitalize on market opportunities or to raise capital to fund growth.
4. Investor Base: Different methods may attract different types of investors. For example, SPACs may attract more speculative investors, while IPOs may attract more institutional investors. The company should consider the type of investors it wants to attract and the level of scrutiny it is willing to endure.

The risks after going public 

Going public involves certain risks and liabilities that a company and its executives may face. Some of these risks include:

1. Securities Law Violations: Publicly traded companies are subject to various securities laws and regulations. Violations of these laws, such as insider trading or failure to disclose material information, can result in legal action and financial penalties.
2. Shareholder Lawsuits: Shareholders may sue a company if they believe it has not acted in their best interests. Examples include breach of fiduciary duty, securities fraud, or mismanagement.
3. Employment-Related Claims: Publicly traded companies may face lawsuits from current or former employees for wrongful termination, discrimination, harassment, or other employment-related claims.
4. Product Liability: If a publicly traded company manufactures or distributes a product that causes harm to consumers, it can be held liable for damages.
5. Environmental Liability: If a publicly traded company's operations or products cause harm to the environment, it can be held liable for cleanup costs, fines, and other damages.
6. Intellectual Property Disputes: Publicly traded companies may face patents, trademarks, or copyright lawsuits. For example, a competitor may allege a company infringing on its intellectual property rights.

To mitigate these risks, companies should establish and adhere to rigorous compliance and risk management practices. They should also ensure that they have adequate insurance coverage to protect against potential liabilities. 

To learn more about how to navigate the risks after your company goes public, contact our expert.

References:

Go Public - A Guide to Taking Your Company Public

IPO, SPAC与Direct Listing: 哪一种在美国上市方式适合您的公司？ - 当纳利金融服务集团 (DFIN)

SEC.gov | Should my company “go public”?

SEC.gov | Going Public

IPO alternatives explained: SPACs and direct listings vs IPOs

Types of IPOs: The Different Ways to Go Public