The pros of raising capital through SPACs vs. investments vs. IPO include decision power, safety, and additional experience. In contrast, the cons include a reduction in ownership/earnings, high-risk exposures, and expenses.
Raising Capital via Special Purpose Acquisition Companies (SPAC)
Pros — Decision Power, Safety, and Speed
- From the investor’s perspective, SPAC gives investors the power to “liquidate their positions at any given time, both through the public market and the SPAC itself.” This option is often not achievable with other types of private co-investments “due to lack of liquidity.”
- Special Purpose Acquisition Companies can also “provide fast track IPO process to private companies and offer investors private equity-like returns.” Additionally, safety measures against potential downsides are in place when using SPACs.
Cons — Risks
- Unlike the standard IPO, investors can turn down a proposed business combination; this poses a risk for the investors and target businesses alike. Furthermore, SPACs pose the risk of deal breaks if the pre-specified percentage of shareholders do not agree to proceed to acquisition.
Raising Capital via Investments
Pros — Additional Experience/Oversight
- Investments from private and venture capital firms lead to a shared interest in seeing the company succeed. Quality leadership, advice, knowledge, and expertise are among the attributes invested in helping drive growth. Furthermore, a strategic partnership can lead to better risk management and an increased success rate.
Cons — Reduction in Ownership/Earnings
- The primary concern with raising funds from investments is reducing ownership/earnings; this can be either through equity fundraising, venture capital firms, partnerships, private investors, or the public. Investments from these groups mean a share in profits and giving up some level of control.
Raising money via Initial Public Offering (IPO)
Pros — Financing
- The primary aim of the IPO is to raise “funds that do not need to be repaid; this allows the company to secure ownership while retaining its existing capital.” Also, more funds can be secured by additional stocks through secondary offerings.
Cons — High-Risk Exposure and Expenses
- There is a high cost for companies that decide to raise funds by going public; they include printing cost, legal, accounting, and registration fees. Most of the time, companies forfeit all expenses if they fail. If they succeed, about 5% to 7% of the money raised goes as commission to underwriters while the SPACs IPO offers an underwriting discount.
- A side effect of raising capital through IPO is exposure. Insiders information such as contracts, stock option plans, and consulting agreements are all made public. This serves as a pool of information for other companies and also attracts hostile takeovers.
To provide one main pro and con of raising capital for a company via SPACS vs. investments vs. IPO, we scoured through industry databases, publications, trusted media outlets, and articles. This search method was successful because we were able to locate the information needed.