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Going Public Circa 2020; Door #3: The SPAC

Bill Gurley
Above The Crowd
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SPACs (Special Purpose Acquisition Companies) are all the rage. What are they? Why do they matter?


SPACs are "blank check" shell corporation designed to take companies public without going through the IPO process.

3 Ways a Company Can Go Public

1) The Structurally Broken IPO Process

IPOs drastically underprice companies. How is this happening? 2 fatal flaws: 1. Traditional IPO does not use a market-based approach to efficiently match supply and demand to discover price. 2. Most potential buyers are blocked out of the IPO process. Why is this happening? Absurd requirements: 1. 97% of every investor you meet should have an interest in purchasing the offering. 2. The optimal target is an absurd 30X over-subscribed (the real oversupply is likely much larger). 1. This is done to benefit the investment bank and its best clients.

2) The Direct Listing

Direct listings take the same processes as an IPO but avoid 2 major flaws of IPOs: 1. It uses a market-based approach to matching supply and demand and discovering prices. 2. Anyone with a brokerage account is invited to participate. Issue: a company cannot use Direct Listing to go public and simultaneously raise capital.

3) The SPAC Merger

Benefits: 1. SPACs are flexible and dynamic. Everything is negotiable. 2. Companies can actively negotiate not just price, but also what % the sponsor shares should be as well as the sponsor warrant coverage. 1. It will make sponsors extremely flexible when a SPAC nears its termination date (otherwise, the sponsor will lose their initial capital commitment). 3. SPACs understand the competitive issues in the market and will be prepared to negotiate and lower their economics. Risk: 1. A company could potentially not make it out if you cannot get shareholder approval or have too many redemptions.

Comparing SPAC to IPO and Direct Listing

  1. SPACs have a much lower cost of capital vs. IPO.
  2. SPACs have access to primary capital vs. Direct Listing.
  3. Companies are under much more control vs. IPO and Direct Listing.
  4. SPACs are a much faster way to become public.
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