When it comes to growth and development, listing is a significant occasion for a company, and nowadays, getting listed on any international exchange is not a difficult task. While raising capital, listing enables a company to strengthen its reputation and structure. It ensures effective monitoring of compliance of the issuer and trading of the securities in the interest of investors while also providing liquidity to them.
Almost every company comes to a point where additional capital is needed to be infused to fund the company’s expansion plans/growth. Thus going public allows a company to overcome these constraints. When a company is listed on a stock exchange, the company increases its credibility and shareholder base.
Furthermore, a company’s credibility and visibility are positively impacted by the investing public and institution as a result of complying with various regulatory norms and ensuring transparency while conducting operations. And liquidity is stimulated when a company is listed, and it gives shareholders the opportunity to realize the value of their investments. It enables the shareholders to transact in the company shares while sharing risks and benefitting from any increase in the value of the organization.
When it comes to the overall operations of the organization, listing brings transparency as well as efficiency, and the management team and the board is accountable to its shareholders. And timely compliance is necessary by providing information/disclosure to the exchange/shareholders as stated in the applicable guidelines or listing agreement.
However, among all these, SPAC and reverse merger is the new trend-in for many companies and startups. Some significant advantages are offered to companies by SPAC, especially for companies that have been planning to become publicly listed. Firstly, in just a matter of months, a company can go public through the SPAC route, whereas the conventional IPO process can be an arduous process that can take up to six months or even more than a year.
“In comparison to other forms of funding and liquidity, SPACs offer target companies specific advantages over them. In comparison to traditional IPs, SPACs offer much higher valuations, greater speed capital, less dilution, lower fees, more certainty and transparency, and fewer regulatory demands.” highlights Ms Rim Mathlouthi.
When we consider speed, for targets, the entire process of SPAC requires only three to five months, with the valuation set within the first month. But when it comes to IPOs it requires almost nine to twelve months, with very low certainty regarding the valuation and the amount of capital raised until the process ends. With regards to valuation, again SPACs overpower where they offer way more than traditional IPOs. Several months before a merger, the SPAC parties, which also include the target, negotiate a binding valuation and a capital commitment (although the valuation is subject to approval by PIPE investors). In contrast, with regards to traditional IPOs, targets largely cede the valuation process to the underwriters, who manage potential investors and directly solicit.
How are SPAC sponsors compensated/motivated?
The Sponsor will typically purchase Founder Shares prior to the SPAC IPO filing. The Sponsor will pay a minimum amount (eg $25,000) for the Founder Shares. The founder’s actions are sometimes referred to as the “promotion”. When SPAC completes its business combination with a target company, the founder’s shares are usually converted into public shares, with the sponsor’s shares being significantly diluted in the combined company. The sponsor also typically receives Founder’s Warrants to acquire additional shares. Founder’s shares and warrants incentivize the sponsor to grow the business and increase stock value.
Furthermore, another advantage is that in comparison to IPOs, SPACs often yield higher valuations for a variety of reasons. Firstly, when it comes to the traditional method, there’s a conflict of interest. Underwriters most of the time have a one-off and transactional relationship with companies that are looking to go public but an ongoing one with their regular investors. The underwriters control the allocation of shares to a large extent and use the process to reward their most important and best clients. And an initial price is set below the market’s actual valuation, which provides higher returns to their buying customers as well as themselves.
Overall, SPACs have dramatically improved as an investment option since the 1990s, and also since just a year ago. Without a doubt, more changes are to come in regulation and the markets. Thus everyone involved in the SPAC process should stay vigilant and informed about the rapidly evolving SPAC.
Ms Rim Mathlouthi is Board Member & Advisor to several international companies. Expert in the field of finance and all that is specific to figures. Past experiences in Asset management and financial consulting in Geneva for numerous high-grade and extremely confidential investment mandates. Email: rm@licorne-gulf.com.