Why SPACs Are the New IPO

The traditional route to going public is too slow for companies that want to cash in on hype

Image: John Lund/Photodisc/Getty Images
Source: SPACData.com

Nikola, DraftKings, and Virgin Galactic all went public through SPACs.

There’s been a recent blizzard of SPAC deals:

  • Pershing Square founder Bill Ackman’s SPAC planned to raise $3 billion, a record. Then it raised its target last week to $4 billion with a novel pricing mechanic. There’s a fixed pool of warrants to be distributed to all shareholders who accept the deal, so as more shareholders reject the deal, more equity goes to the ones who accept it. This sounds more like a game theory thought experiment than a useful feature, but we’ll see.
  • Nikola, DraftKings, and Virgin Galactic all went public through SPACs.

In the ’90s, you could start a company, prep it for IPO, take it public, and white-knuckle your way through the lockup, all before the bubble popped.

That’s why the most compelling explanation for the SPAC boom is not that the IPO process is costly (it’s expensive but cheaper than a SPAC), but that it takes a long time. And that’s especially challenging for companies that want to ride a hype wave. In the ’90s, you could start a company, prep it for IPO, take it public, and white-knuckle your way through the lockup, all before the bubble popped. The dot-com bubble had incredible turnaround: DrKoop.com was founded in July of 1997 and filed its S-1 in March of 1999. Pets.com launched in November of 1998 and went public in February 2000. Hotjobs, a comparative laggard, was founded in February 1997 and didn’t manage to produce a prospectus until June 1999.

The SPAC is the Vegas wedding chapel of liquidity events; it seems like an urgently good idea at the time, but it doesn’t always turn out that way.

The standards for SPACs are lower, so any time there’s a well-hyped trend or the possibility of one, a SPAC is the right vehicle for a quick IPO. Nikola is not a coincidence. MP Materials, for example, is a trade-war play; they’re the only U.S. producer of rare earth, and China has used rare-earth embargoes as a policy tool in the past. So now is a great time to offer the market a pure-play on domestic rare earth.

I write about technology (more logos than techne) and economics. Newsletter: https://diff.substack.com/

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