David Gardner: SPAC versus IPO — how to pick where to put your money

Over the last year special purpose acquisition companies have roared into prominence for private companies looking to go public.

Known as SPACS, these so-called blank check companies offer a quick way to bypass the regulations and uncertainty of the traditional initial public offering (IPO) process.

We’ll take a look at how SPACS differ from traditional IPOS and whether they could be a wise investment for you.

Unlike a traditional IPO, when you put money into a SPAC you purchase shares in a shell corporation offered by an investment firm.

You’re not investing in a known entity where you scrutinize its potential revenue growth, profitability, and market share. Instead, you’re investing into a fund that the SPAC sponsor can use to purchase a private company.

Sometimes the SPAC sponsor will articulate what sort of companies they are targeting. In other cases, the SPAC sponsor has free reign to select an acquisition.

The traditional IPO process can take the better part of the year with private company executives and the under writers going on a “roadshow” to pitch the stor y of the company to potential investors.

It’s an expensive, timeconsuming process. If the roadshow is successful, then a final prospectus is issued for potential investors for analysis followed by an Sec-enforced quiet period.

Even with the distractions and cost of the roadshow and registration process, there’s still no guarantee that the company will have a successful IPO.

With SPACS there is rarely a roadshow or a quiet period. Yet there are more assurances that a transaction will be consummated than with a traditional IPO. Once a deal is announced and approved the SPAC will purchase the private company and generally the stock ticker and name of the

SPAC will change to reflect the name of the acquired company. Instead of a SPAC, the formerly private company is now publicly traded in a fraction of the time of a traditional IPO.

While the decision to invest in a SPAC is not an easy one, purchasing shares is easily done. There’s no concern about accredited investor rules as anyone with access to a trading app can invest in a SPAC.

As an example look for a quote on CRU.U, which is a SPAC sponsored by a Boulder firm, the Foundry Group. Currently it’s trading at $10 a share and your teen with a Robinhood account can invest if you give them a few seconds on their mobile phone.

Whenever you enter into a significant financial transaction, particularly one that’s novel to you, it’s important to understand how the different parties are being compensated.

The private company owners will benefit through the purchase of their company shares. But what about the SPAC sponsor?

They usually end up with special founder shares in the SPAC that are purchased for a small amount but could represent significant ownership in the company.

In return for having the SPAC sponsor raise the funds, target a private company to acquire, and negotiate the terms, common shareholders will effectively have their investment diluted by the founder shares. To be fair, once a private company has been identified and before the acquisition is finalized, SPAC shareholders will generally have the option of selling their shares for the original offering price (usually $10/ share).

In my opinion, the case for most investors to put their money into a SPAC is