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Comment by engineer_22 | Hacker News Reader

Why would a company go through a SPAC instead of an IPO?

Does the SPAC merger constitute a hedge against uncertainty in an IPO? What I mean is, 23andMe gets cash NOW and the SPAC gets the company at a discount but accepts the risk the IPO might not meet its goals?

Could someone please explain the strategy?

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In addition to speed and guaranteed price a SPAC merger also has less reporting requirements, because the SPAC already did go trough the IPO paperwork when it was created. And didn't have to explain weird things about the business to investors because it had no history or things to be going on. It then can relatively easily buy 23andMe, and 23andMe doesn't have to explain its business risks etc to the public as much - which could have been an issue and risk to the stock price given the history of probes about medical claims etc.

Am I the only one who thinks that's a massive hole in the rules? You IPO an empty shell, which passes easily because it does nothing, and then any old shop with a messy business can then be bought by it?

Yes, that's pretty much the idea.

Back in markets, we would of called it 'regulatory arbitrage.'

Why doesn't every IPO happen this way? Once you want to go public, you make a SPAC, get that approved, then have it buy your business?

The sponsors of the SPAC set aside for themselves a big chunk of the shares of the newly combined entity. So in general, the company gets a worse price than it would if it had gone public via an IPO.

So if the principals involved in a startup set up their own SPAC to take the company public, they could screw minority shareholders in the original company like, say, employees?

The laws generally require that these things be “arms length transactions”, basically meaning that the two parties are legitimately at odds over the price. Your example would not be that.

Most sponsors don't hold shares unless for the stock pops way beyond the $10. For the average company, you may end up as a public company with no cash raised. This can be mitigated by a concurrent PIPE, but otherwise you're SOL.

Right now it kind of seems like every IPO does happen this way. There's kind of a SPAC mania going on. I can name at least 5 companies that are going public through SPACs, and two more that are rumored to be doing the same soon (Virgin Orbit and Lucid Motors).

What I mean is why don't traditional businesses IPO in this way? If it's a pain to do due dilly with a real business, why isn't this a back door?

Theoretically, you get a lower price with an SPAC. However, if so much money is looking for returns, then the price might not be so low as to discourage it compared to other traditional ways to IPO.

SPAC acquisitions raise significantly less money for the target acquired company, so generally a target only goes the SPAC route if their financials aren't in good enough shape to go the traditional IPO route (offering, dutch auction, or otherwise).

Most SPAC acquisitions involve high-risk companies, for recent examples: Lucid (10 years on and still no actual product for sale), Nikola (fraud), 23andMe (its financials are reportedly not in great shape), Opendoor (huge portfolio of risky real properties), EVgo (history of massive losses), Clover Health (accusations of fraud, under DOJ investigation).

SoFi is the only company I can think of that is going the SPAC route that was potentially in the shape to IPO (their potential IPO was tenatively valued at $17 billion at the start of 2020, but the SPAC acquired them for around 8.65 billion). They apparently chose not to IPO because they wanted "deal certainty." However, leaving that much money on the table is a huge red flag for a financial company; it suggests that 2020 was a bad year for them and that they wanted to avoid disclosure, or that their financials are not in great shape.

No you're not the only one, it is a massive loophole that benefits corporations and the perfect example of why government regulation can never really work in the end. There will always be a way around found.

On top of this, SPACs usually have private PIPE investors who get shares at the "IPO" price, typically 10 dollars, while people who buy the public SPAC shares typically have to pay twice that, which feels super scammy.

https://www.investopedia.com/terms/p/pipe.asp

Why? Earlier investors always get better prices before opening to the public, in exchange for helping the company go public.

Pipe != Early

https://www.investopedia.com/terms/p/pipe-deal.asp

That sounds a bit like claiming that it's scamy a company founder gets a higher salary than future employees. Of cause the company is allowed to raise money anyway it sees fit, including providing discount for individual investors for any given reason. If you don't like how they are carrying out their business you can just not invest. Which you might be leaning towards, which is why if you where a potential big investor they might offer you a discount to get you onboard as well.

Check out The China Hustle for a great documentary on this topic: https://www.rottentomatoes.com/m/the_china_hustle

It's currently streaming on Hulu and Amazon Prime Video.

I wouldn't consider it a hole in the rules, it's more of an alternative listing method.

In my view, nothing materially changes. If 23andMe is a turd then an IPO through Goldman or JPMorgan isn't going to really change that, and neither will an SPAC.

Although it's a little bit "gambling" because you don't know what the SPAC acquisition will be ahead of time, I think the SPAC vehicle is great for retail investors. If you take IPOE and SoFi for example, you could have bought Social Capital Hedosophia's IPOE SPAC at $13/share or something and watched it grow once the shares were slated to be turned into SoFi shares. But in the traditional IPO process, well, you get to buy the SoFi shares at the IPO price. If you have a high net worth, that's probably fine. But if you're a retail investor - well, look at AirBnB's IPO price at $68/share and what you could actually get it at on IPO which was closer to $140 or something.

In other words, you get a little bit of exposure to the game, and of course a little bit of exposure to the risk as well which is "I don't know who they will merge with".

So in other words, a SPAC is “a company for carrying out an undertaking of great advantage, but nobody to know what it is”?

https://en.m.wikipedia.org/wiki/South_Sea_Company#Top_reache...

It was apocryphal during that bubble; it’s real now. I do not find that to be a good thing...

Once the SPAC has identified a company to buy, investors in the SPAC get a choice to either stay invested or get their money back with interest. So it's only a blank check initially, but not once it matters. Source: https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m...

What? At least as described above, the material requirements for disclosures changes. Is the description above wrong or do you not find disclosures to public market investors to be material?

I don't think they're material. The IPO prospectus for companies is a sales pitch with a bunch of legal "we may never make money" comments. If you commit fraud you'll wind up in court, disclosures or otherwise. Oh and nobody reads any of these documents, let alone any quarterly numbers.

I think SPACs are certainly a more risky way to put your money to work, but they're fine.

Companies that don't make money, have never made money, and to my eyes have absolutely no path to profitability IPO too - the banks just like to collect fees to get you to the public market. Does it really matter if they do it through an SPAC? I don't think it does.

I disagree in the importance of an S-1 disclosure. Detailing the actual business plan of the company, as to what people think the plan is, was invaluable for WeWork. Uber's quarterly earnings are a continual source of entertainment. I personally wouldn't put any money into a public company before an actual SEC-required statement, and an SPAC bypasses the first.

I think it depends on what we're talking about, right? My suggestion is that largely nobody cares or looks at these disclosures, not that they aren't important. I think institutional investors probably do, but they're certainly willing to invest in SPACs as well, it's not like it's only retail investors who buy shares of SPACs.

Your point about the business plan is interesting... it depends on the perceptions that investors have that the company can achieve a business plan, but it's not necessarily accurate right? Uber was going to do all this autonomous taxi stuff, and had it outlined in their business plan. WeWork was punished for having a crappy business plan before it filed, Uber has a crappy one (or at least one that turned out to be crappy in my opinion) and went public anyway. The disclosures certainly didn't help much - they aren't a guarantee. Things like Adam Neumann leasing his own properties to WeWork came out before any of these disclosures. If WeWork went the SPAC route (and it actually looks like it will at a $10bn or so valuation), it's not like you really hide all that stuff any more than you hide it in the normal IPO process.

If you don't like that Social Capital Hedosophia is taking SoFi public via IPOE SPAC, you can dump your shares. It's not like you have to hold the shares. It's a speculative position to take. Hell, at least you can actually dump the shares before the listing even happens - for IPOs there can be lockup periods where you wind up losing money because the IPO was way overpriced. Banks get their fees either way (which is fine).

My understanding was that SPAC shares came with a warrant that could be exercised for shares in the acquisition target, rather than transmuted directly into shares. After the management fee, market premium and exercise cost are you really coming out ahead? Am I misunderstanding the mechanics?

No, you're not coming out ahead. You're roughly paying a 20% cost of capital. In today's frothy markets, you might make up for that in the public markets, but it does seem that mostly second tier companies are going public through SPACs.

Depends on the SPAC and the target company.

>alternative listing method

I know porn when I see it, and this is a flashing neon sign that reads "get in on our definitely not fraudulent spacs here to absolutely not lose money to the institutional investors juicing a most assuredly not failing business"

The company I work at, which shall remain nameless, is going through or went through this SPAC process, and we're assuredly growing and have good fundamentals, so it's not _just_ a parlor trick for Wall Street, but _some_ of them probably are.

If you’re investing in an SPAC, you should know this already. Everything is transparent, so I don’t see what the loophole is, or who or how anyone is getting bamboozled?

Company wants to go public with higher guarantee of price, they go with SPAC. Investor wants higher return, they invest in SPAC, but there is no higher return without higher risk.

No you're not. It's entirely a loophole being regularly exploited.

Now whether the existing IPO requirements could/should be streamlined is another question.

That’s why everyone is riding the gravy train as fast as possible

The company gets to go public without having to immediately provide all the materials for due diligence for public investors. The companies shares get peddled to the general public and the SPAC investors and the company both win. The public is left holding the bag.

Don't forget skimping out on the fees and money left on the table when dealing with a traditional investment bank.

SPACs acquire targets for significantly less than the potential IPO price, and their are still fees and deal costs associated with the merger, so from the target's perspective, you still end up with less than you would with a traditional IPO even after the fees of a traditional investment bank.

So why would a company ever go the SPAC route? SPACs are all about avoiding the (financial) disclosure required for a company going public the traditional way, and if you take a look at the list of companies getting acquired by SPACs this year, every single one of them has a red flag that would make their IPO risky (see, e.g., We).

There is direct listing (DPO). Spotify and Slack did that.

Wow that seems like the kind of behaviour you'd see in a massive speculative bubble.

People buying blank cheque companies without knowing what they're going to get.

If you don’t like what the SPAC is going to do then you can get your money back before it’s used in the acquisition.

I'm not sure I buy that - you're only likely to find out it was a bad idea after the takeover, because the deal is deliberately opaque, early investors get special rights, it may only be for a small part of the private company's value, and the private company has not usually published all the data required of a public company.

There are very good reasons IPOs require all sorts of public documentation and due diligence. All that regulation which SPACs attempt to side-step is there because of previous scams run in just the same style as SPACs.

They are reminiscent of the weird companies formed during the South Sea Bubble e.g. A company for carrying on an undertaking of great advantage but no-one to know what it is

> Does the SPAC merger constitute a hedge against uncertainty in an IPO?

Yes, that's exactly right. You're basically paying for certainty.

Matt Levine has the best ELI5 on this subject that I've seen:

https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m...

Here's the high-level summary from that article, though there's a lot more detail that's worth digging into:

> Here’s how a SPAC works:

1. You give me $10.

2. I put your $10 in a pool with a bunch of other people’s $10, held in a trust account at a bank.

3. I give you back one share in the pool (representing $10 of money in the pool), and one-quarter of a warrant to buy another share for $11.50. (The combination of the share and part of a warrant is sometimes called a “unit.”)

4. I try to find a company to take public within two years.

5. If I fail, I give you back your $10 with interest.

6. If I succeed, I merge the pool with the company, giving the company the money in the pool and giving you and your fellow shareholders shares (and warrants) in the new combined company. Also I get a bunch of shares and warrants in the combined company, as a reward for my work.

7. When I do this, I give you the choice to either (a) let your money ride and take a share in the new company or (b) get your $10 back, with interest.

Can the general public invest in SPACs? Are there SPACs that target specific markets, like tech, finance, real-estate, etc?

> Can the general public invest in SPACs

Yes. I'm pretty sure the ticker symbol of this one is VGAC.

The problem you get is this: https://vgacquisition.com/objective/

> VG Acquisition Corp (VGAC) aims to invest in a strong business with a proven track record that can deliver attractive returns to public market investors by capitalizing on Virgin’s brand and global resources.

I'm sure some target specific markets, but this one doesn't.

https://spactrack.net/activespacs/

I don't see anything especially wrong with them and what they do because they're really just a way around the IPO paperwork and restrictions. Usually, a lot of that feels like a formality, but it did surface some interesting things about Wework. That said, it's a bet on the team, and you have no idea what they're going to find. It's a little like investing in a less-diversified, late-stage venture fund.

The investing public loses out on valuable information. It's an end-run around disclosures.

That's not a good thing.

>they're really just a way around the IPO paperwork and restrictions

Is this really where we are at?

>Usually, a lot of that feels like a formality, but it did surface some interesting things about Wework.

WeWork was one in a long list of these jackpots.

The major benefit of going public via an SPAC is avoiding the onerous disclosure requirements associated with an IPO. In particular, the SEC frowns upon projections of imminent, wild growth, which is a big part of the valuation of many companies seeking to go public these days.

With an SPAC, a company can go public while still hyping the stock on YouTube or whatever, and without suffering a lockup period during which its executives are not allowed to sell into the mania. The SPAC phenomenon why have suddenly seen so many overhyped companies (NKLA, anyone?) in the public markets lately.

23andMe gets to IPO immediately without having to go through a lot of the regulatory work that would normally happen in a direct listing because the SPAC acquiring them is already public. This means they can get a good percentage of the normal cash infusion with half the hassle.

Those creating the SPAC get a discounted price on the stock they eventually take public, but for the bill via increased risk they might not get a good company.

Th last twenty Bloomberg Money Stuff [1] columns get into the details of SPAC vs IPO. Matt Levine does a pretty good job explaining finance stuff to non-finance people.

[1] https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthe...

One factor is predictability in initial price. The SPAC & company negotiate a fixed price to go public. With an IPO the company begins the process with a valuation in mind but a lot of it still comes down to the roadshow investors, for better or worse.

>Why would a company go through a SPAC instead of an IPO?

Less regulation and disclosure. Don't let anyone tell you differently.

I believe a SPAC might be cheaper and has less obligations before "going public" that an IPO.

so they can continue to hide from public that most of their revenue is from secondary use they monetize from their database: research & law enforcement (or anyone that wants to buy their anonymized database, that still seem to contain zipcode)

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