SPAC vs IPO: Two Paths to Going Public

SPAC vs IPO: What Is the Difference?

A SPAC and a traditional IPO are two distinct paths a private company can take to become publicly traded. An IPO involves the company itself filing a registration statement with the SEC, conducting an investor roadshow, and listing its shares through investment bank underwriters. A SPAC is a blank-check shell company that first IPOs with no operations, then identifies and merges with a private target company, effectively taking it public through a reverse merger.

The key tradeoffs are speed, cost, pricing certainty, and regulatory scrutiny. SPACs are faster and offer negotiated valuations, but they introduce dilution from the sponsor's promote and warrants. IPOs take longer and have uncertain pricing until the final book is built, but they carry the credibility of investment bank due diligence and avoid the structural dilution inherent in SPACs.

Both mechanisms ultimately achieve the same result — shares of the formerly private company trading on a public stock exchange — but the path and its consequences differ significantly for both the company and its investors.

How a Traditional IPO Works

In a traditional IPO, the company works with one or more investment banks (lead underwriters) to prepare for a public listing. The process typically takes 6 to 12 months from initial engagement to the first day of trading.

Key stages of an IPO:

1. Selection of underwriters. The company chooses investment banks (Goldman Sachs, Morgan Stanley, JP Morgan, etc.) to manage the offering. Lead underwriters earn 5-7% of total proceeds as their fee.

2. SEC registration. The company files an S-1 registration statement containing detailed financial disclosures, risk factors, management information, and use of proceeds. The SEC reviews the filing and may issue comment letters requiring amendments.

3. Roadshow. Company management presents to institutional investors over 1-2 weeks, building interest and gauging demand.

4. Book building and pricing. The underwriters collect indications of interest from institutional investors and set the final IPO price the night before trading begins. The price reflects the intersection of company valuation expectations and investor demand.

5. Listing and trading. Shares begin trading on the NYSE or Nasdaq. A designated market maker facilitates orderly price discovery on the first day.

Arm Holdings (ARM) followed this traditional path in September 2023. SoftBank, Arm's parent company, worked with banks including Goldman Sachs, JPMorgan, and Barclays over many months. Arm priced at $51 per share, raising approximately $4.87 billion in the largest IPO of 2023.

How a SPAC Works

A SPAC reverses the traditional sequence. The shell company goes public first, then finds a target to merge with.

Key stages of the SPAC process:

1. SPAC IPO. A sponsor (typically an experienced investor, private equity professional, or former executive) forms a blank-check company and takes it public, usually at $10 per share. The IPO proceeds go into a trust account invested in U.S. Treasuries.

2. Target search. The SPAC has a defined window (usually 18-24 months) to identify and announce a merger with a private company. If no deal is completed, the trust is returned to shareholders.

3. De-SPAC merger announcement. The SPAC announces its merger target along with the negotiated valuation, projected financials, and transaction structure. This is when the target company and its valuation become known.

4. Shareholder vote and redemptions. SPAC shareholders vote on the proposed merger. Those who do not approve can redeem their shares at approximately $10 plus accumulated interest (the trust value). High redemption rates can reduce the cash available for the merged company.

5. Merger completion. The SPAC and target merge, and the target company's shares begin trading under a new ticker symbol.

Lucid Motors went public through a SPAC merger with Churchill Capital Corp IV (CCIV) in July 2021. The deal valued Lucid at approximately $24 billion. CCIV shares had surged from $10 to over $60 on merger rumors before settling, illustrating the speculative dynamics that often accompany SPAC deals.

SPAC vs IPO: Key Differences

Cost Comparison: Dilution vs Fees

IPO Costs

The most visible IPO cost is the underwriting discount, which runs 5-7% of total gross proceeds. On a $1 billion IPO, the company pays $50-70 million to its underwriters. Additional costs include legal fees ($2-5 million), accounting and auditing ($1-3 million), SEC filing fees, exchange listing fees, and roadshow expenses. Total all-in costs typically range from 7-10% of proceeds for a standard IPO.

SPAC Costs

SPAC costs are less transparent but often higher when fully accounted for. The sponsor promote is the primary cost: the SPAC sponsor receives approximately 20% of post-IPO shares (called founder shares) for a nominal investment, typically $25,000. When the $400 million SPAC trust merges with a target, the sponsor's 20% stake comes directly at the expense of public shareholders through dilution.

Additional SPAC costs include:

• Warrants. SPAC IPO investors receive warrants (typically 1/2 or 1/3 of a warrant per share) that can be exercised post-merger, creating further dilution.
• PIPE financing. Many SPAC mergers include a Private Investment in Public Equity (PIPE) round, often at a discount to the deal valuation, diluting existing holders.
• Redemption drag. If many shareholders redeem at $10, the merged company receives less cash, sometimes triggering the need for additional financing at unfavorable terms.

Research has shown that the effective cost of a SPAC, accounting for all dilution, often exceeds 15-25% of the capital delivered to the target company, significantly more than a traditional IPO.

Pricing Certainty and Forward Projections

One advantage of the SPAC path is pricing certainty. The merger valuation is negotiated and agreed upon before shareholders vote. The target company knows exactly what valuation it will receive (assuming the deal closes). In a traditional IPO, the company sets a preliminary range (e.g., $48-52 per share) but does not know the final price until the night before trading begins. Strong demand can lead to upsizing, while weak demand can force a price cut or even a pulled offering.

SPACs also allow target companies to include forward-looking financial projections in their merger proxy materials. Traditional IPO issuers are effectively prohibited from publishing revenue and earnings forecasts in their S-1 filings due to liability concerns. This makes SPACs particularly attractive for pre-revenue or early-revenue companies in sectors like electric vehicles, space technology, and biotech, where the investment thesis depends on future growth rather than historical results.

However, the SEC has scrutinized SPAC projections increasingly since 2022, and new rules adopted in 2024 reduced the safe harbor protections for forward-looking statements in SPAC transactions, narrowing this advantage.

Lock-Up Periods

IPO Lock-Ups

Traditional IPOs impose lock-up periods of 90 to 180 days on company insiders (founders, executives, early investors, employees with stock grants). During this period, insiders cannot sell their shares. The lock-up expiration date often creates selling pressure as restricted shareholders gain the ability to liquidate.

Arm Holdings had a standard 90-day lock-up following its September 2023 IPO, with SoftBank (the majority holder) agreeing not to sell its shares for 180 days.

SPAC Lock-Ups

SPAC lock-up structures vary by deal. Sponsor shares are typically locked for 6 to 12 months post-merger. PIPE investors usually face a 6-month lock-up. Some deals include performance-based lock-ups where sponsor shares are released in tranches as the stock reaches certain price targets.

The lock-up dynamics can affect post-merger trading. High insider ownership combined with short lock-up periods can create a wave of selling when restrictions expire, putting downward pressure on the stock.

Building a Diversified Portfolio With Newly Public Companies

Whether a company comes public through a SPAC or an IPO, portfolio diversification principles apply. Newly public companies tend to be more volatile than established public companies. They lack extensive public trading histories, may have limited analyst coverage, and their shareholder bases are still stabilizing.

Investors allocating to newly public companies should consider position sizing carefully. A common approach is limiting any single newly public company to 1-3% of a portfolio and waiting at least one or two earnings cycles before building a full position. This allows time for the post-listing price to stabilize and for the company to establish a track record as a public entity.

Frequently Asked Questions

Are SPACs safer than IPOs for investors?

SPACs provide a unique downside protection mechanism: shareholders can redeem at approximately $10 per share (the trust value) before the merger closes. This floor does not exist in traditional IPOs, where the stock can decline immediately after listing. However, post-merger SPAC performance has historically lagged traditional IPOs on average. The redemption right protects you pre-merger, but once the deal closes, the shares trade like any other stock and the floor disappears.

Why did SPAC activity decline after 2021?

The SPAC boom of 2020-2021 was driven by low interest rates, abundant capital, and speculative enthusiasm. Activity declined sharply due to poor post-merger performance by many SPACs, increased SEC scrutiny and new disclosure requirements, rising interest rates that made alternative investments more attractive, and several high-profile SPAC failures. The SEC's 2024 rules requiring SPACs to provide additional disclosures and reducing safe harbor protections for projections further cooled the market.

Can a company choose between a SPAC and an IPO?

Yes. Companies evaluating a public listing often consider both paths simultaneously. The choice depends on factors including desired timeline, current market conditions, the company's financial maturity, appetite for sharing projections, and the cost of available SPAC deals versus underwriting terms. Companies with strong revenue track records and established brands tend to prefer traditional IPOs. Pre-revenue or early-stage companies with compelling growth stories may find the SPAC path more accessible, though the window for pre-revenue SPACs has narrowed considerably since 2022.

What is a de-SPAC, and why does it matter?

The de-SPAC is the merger transaction itself — the moment the blank-check SPAC combines with the target company and the target begins trading publicly. This is the most critical phase of the SPAC lifecycle. Shareholders vote, redemptions are calculated, and the actual amount of cash delivered to the target is determined. High redemption rates (sometimes exceeding 80-90%) can leave the merged company with far less capital than the original trust held, potentially undermining the business plan.