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SPAC vs IPO vs Direct Listing: Comparing Ways to Go Public

Considering going public with your company? Looking to learn more about IPO alternatives? In this blog, we’ll be breaking down SPAC vs IPO vs direct listings, sharing information on each so you can figure out which way of going public is best for your business.

Let’s start by comparing the unique features of SPAC transactions against direct listings vs IPO transactions. We’ll also cover frequently asked questions that are helpful to consider as you weigh your options.

SPAC Transaction

• What is a SPAC: A special purpose acquisition company (SPAC), also called a shell company, gains capital through an IPO but then acquires or merges with an existing private company. 
• Ideal for: Companies looking for a faster path to becoming public, as well as a partnership with experienced SPAC sponsors.
• Primary goal: go public through a merger with a public “shell” company and raise capital via PIPE. (Private Investment in Public Equity)
• Timeline to go public: Typically faster than IPOs (around 3-5 months for de-SPAC), but SPACs have between 18-24 months to find a target and execute the merger.
• Pricing is determined by: negotiations between the SPAC entity and the target company.
• Regulatory scrutiny involves: SPAC’s IPO filings and the de-SPAC merger filings (S-4/proxy statement)
• Lock-up period for investors: It varies but is less restrictive for the SPAC investors, whereas the target company insiders may have lock-ups.

IPO Transaction

• What is an IPO: This is when a company issues its stock to be traded on public markets for the first time with the help of underwriters, offering shares that anyone can purchase.
• Ideal for: Companies that want a broad investor reach and significant amounts of new capital.
• Primary goal: Create liquidity for existing shareholders and raise new capital through new shares.
• Timeline to go public: Long, ranging from 6-9+ months formally, but 18-36 months with preparation time included.
• Pricing determined by: Underwriters (investment banks) who set the price offering.
• Regulatory scrutiny involves: SEC registration (S-1 filing).
• Lock-up period for investors: typically insiders and early investors are restricted from selling for between 90–180 days.

Direct Listing (Direct Public Offering)

• What is a direct listing: This is a different means of going public where the company registers existing shares that its current shareholders can then sell to the public, all without involving underwriters.
• Ideal for: Companies that have capital but are also looking for strong brand recognition and liquidity for existing shareholders.
• Primary goal: Increasing liquidity without having to raise new capital through traditional means.
• Timeline to go public: Around 10-12 weeks.
• Pricing determined by: The market, with the supply and demand on the first day you’re publicly trading.
• Regulatory scrutiny involves: SEC registration (S-1 filing).
• Lock-up period for investors: No, existing shareholders can sell immediately on the first day of trading.

Frequently Asked Questions About Going Public

When can a company go public?

At Centri, we recommend being prepared as fully as possible from day one when you consider going public as a viable goal. (Even if the actuality of it is years away.) And remember that there’s opportunity in the uncertainty of market fluctuations that you can use to your advantage. What’s more important is building your company on  good fundamentals so you’re ready before going public. Find more helpful, in-depth advice on when you should go public from our team.

What kind of financial preparation is needed?

Going public requires getting 2-3 years of your historical financial statements audited by a PCAOB-registered firm. You’ll also need to transform your accounting systems so they’re prepared to handle the complexity and timing of public company reporting. Along with this, you’ll need to ensure there are robust internal controls established around your reporting to meet Sarbanes-Oxley (SOX) requirements. It’s also important to present a strong equity story to possible investors, so your business will need to have multi-year financial models and forecasts that are accurate. 

What corporate governance structures are required?

First, you’ll need to establish a Board of Directors that includes independent members. Along with that you’ll need audit, compensation, and corporate governance committees, along with a written charter for each one. Once those pieces are finalized, as a public company, you’ll need to establish a code of business conduct and ethics that applies to all members of the organization and adhere to disclosure obligations that are set by the SEC around stock exchanges.

What are the challenges of being a public company?

There is a lot more scrutiny and different regulations your business must follow, such as SEC financial reporting requirements. In addition to that, you may lose some of the flexibility in decision-making that existed when you were a private company, particularly in cases that require shareholder consent. Your company’s key information, like financial statements, contract disclosures, supplier information, and more, will be public. Which means your competitors will be able to access that information.

What are some of the costs of going public?

For an IPO: underwriting, legal team, advisory support, audit, SEC registration, FINRA, exchange listing, and roadshow fees account are some of the costs you’ll encounter.

For a SPAC: sponsor, deferred underwriting, PIPE financing, legal, accounting, advisory, exchange listing, and due diligence fees.

For a direct listing: investment bank advisor, legal, accounting, auditing, SEC registration, exchange listing, and advisory support fees.

Who typically chooses to do a direct listing?

Often, this path is chosen by businesses that are well-established and don’t necessarily need to raise large amounts of capital through a traditional IPO. Instead, they’re looking to go public for the recognition that comes from that and in order to offer liquidity for their existing shareholders.

What are the benefits of SPAC vs IPO?

Timing is certainly a major benefit of choosing a SPAC vs IPO transaction. The process can offer a possibly faster path to market. Plus, there is a bit more price certainty because the valuation is negotiated with the SPAC sponsor. And the private company also has a strategic partner in the process from the SPAC’s management team.

If gaining access to more capital is your goal, doing an IPO may be a better option. The biggest benefit from it is the additional funds it raises, which can then be used to fund company growth through M&A activities or other strategies.

What are the pros and cons of SPACs?

SPACs bring access to capital, including PIPE funding, with faster timelines to being listed (at least historically). On the flip side, there’s potential risk since everything is relying on a successful merger. SPAC investors can also redeem their shares, which means there may be less available capital for the target company. There are also changes around SPAC regulatory scrutiny that will possibly lengthen timelines.

Can a SPAC acquire a public company?

While it might contrast with traditional SPAC models, the answer is yes. There has been a noticeable trend of more SPACs acquiring public companies. The reasons for this may differ, but for some, it’s an attractive option if they’re seeking a US listing or wanting to improve their market presence. In some instances, the merger of two public companies may also yield better value. 

Derek Kearns

Partner | SEC, Financial Reporting & SPAC Practice Leader | CPA

Derek is a Partner at Centri Business Consulting and the leader of the firm’s SEC, Financial Reporting, & SPAC Practice. He has more than 23 years of accounting experience in both public and private industries. View Derek Kearns's Full Bio