“think about what’s your risk appetite versus the cost to have certainty in the limits you buy, regardless of how you go public. ![]() We’ve seen the number of lawsuits increase, along with defense costs, settlements, premiums, and retentions. But that’s not the case, Peinsipp noted: “At the end of the process, you are a publicly traded company, and need to be completely prepared to be one.”Ĭompanies also need to remain attuned to managing potential risks, including the increased liability that comes with being an executive or director of a public entity, said Deirdre Finn, Practice Leader, Executive Risk Solutions, Newfront. Understanding those requirements and setting everyone’s expectations properly is of critical importance.įinally, there are some misconceptions about the SPAC route – notably that it is a way to circumvent some of the preparation that would go into an IPO, or at least to backload them. It’s also important for the private company to look at the different rules and agreements they have in place concerning things like equity and liquidation. That can be an issue if there’s significant liquidity pressure from shareholders. Unlike a direct listing, where employees and other shareholders get immediate liquidity, with a SPAC people must still wait for the opportunity to sell. And lock-up periods, while their lengths are negotiable, are standard in SPAC transactions, as they are in traditional IPOs. While SPAC has a lot of appeal for the right company, there also are some potential disadvantages.īecause there is only one entity involved, which already has a public company structure, the private company doesn’t have the same opportunity to choose their institutional shareholders or board the way it would with a traditional IPO. So, for smaller companies with fewer resources for going public (or whose founders remain vital to the day-to-day progress of the company), SPAC may be a good choice for avoiding both costs and headaches for which they are not well prepared. “The CEO and CFO end up being very distracted, and that puts a strain on the back office to have blocking and tackling down for rest of the organization.” ![]() “A lot of decisions to be made” in the months leading up to traditional IPO, said Tim de Kay, Audit and Assurance Partner, Deloitte. At the same time, eliminating the road show means that top management won’t have their attention and time monopolized for those months, allowing them to remain focused on the business. Companies opting for SPAC don’t have to prepare for and undertake a grueling “road show” pitching the IPO to prospective investors – a process that could last months. Because of this, he noted, a company in a SPAC transaction “could raise more money than in a traditional IPO.”Īnother advantage is potentially lower costs. One is that the private company’s valuation is negotiated with a single party, rather than with a group of investment bankers, so there’s greater certainty about the capital that the private company will receive upon its IPO. Investors typically receive both shares of the acquired company, as well as warrants to purchase some additional shares.įor many private companies seeking to participate in the public markets, the SPAC route can prove attractive for a number of reasons, said attorney David Peinsipp, who is Partner & Co-Chair of Global Capital Markets for Cooley LLP. ![]() When a SPAC acquires a private firm, that firm becomes public through the transaction their private shares are converted into the public shares of the SPAC. Institutional and retail investors alike can own shares in a SPAC that investment capital provides the SPAC with its M&A war chest. “There’s a lot of capital out there,” noted Lucy Wang, Managing Director, Equity Capital Markets, JP Morgan, “and half are in the SPAC world.”Ī SPAC (Special Purpose Acquisition Company) is a publicly-traded shell company that’s organized specifically to raise capital for the purpose of buying private companies over a fixed period of time, often two years. Among other topics, the panelists discussed the growing trend of “SPAC” IPOs in the midst of a market looking for investment opportunities – especially in health care and technology, which represented 67% of the IPO activity so far. Newfront recently co-sponsored a virtual panel discussion on preparing for an IPO, in conjunction with Columbia Pacific Wealth Management, and Nasdaq. The traditional IPO is giving way in many cases to an alternative called SPAC that can present certain companies with advantages – but also has its risks. ![]() What’s different this year is the path an increasing number of companies are taking to the public markets. In fact, 2020 is already outpacing last year in both the number of IPOs and the capital raised, some $200 billion so far. Companies have hardly slowed down their IPO plans in 2020, despite the temporary pause this spring when the COVID-19 pandemic began.
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