Ways to offer a pizza slice

  • Initial public offer
  • Dutch auction.
  • Direct public offer (Also, known as direct listing).
  • Special purpose acquisition company (SPAC).

Dutch Auction

This method is not in trend these days. But it gained a lot of traction during the dot-com bubble financial crisis.

Direct public offer —

Unlike IPO, here the company doesn’t hire underwriters or any other intermediaries to sell the shares. Instead, the company directly offers its shares to the public to raise capital. The company itself sets all the rules and conditions related to the offering i.e. the offer price, minimum deal size, a limit on the number of securities one investor can buy, and the offer period. So, unlike a traditional IPO, the company is not selling shares to anyone; rather, existing shareholders are instead selling some portion of the shares they own, to a new set of institutional investors.

Advantages

  • It is a faster and cheaper process than going public via an IPO. There are no underwriting fees paid to investment banks.
  • When a company goes public via an IPO, the underwriters distribute shares among select brokerages who then impose restrictions on who is allowed to participate in the IPO. This can make it hard for all investors to gain access to IPOs. With a direct listing, stocks being listed on the market for everyone to access and trade.
  • Insiders can sell the shares immediately unlike 180 days restriction insiders have on IPO.
  • Most of the time, underwriters buy the shares from the company at a fixed price, and on the day of opening, share price surges which leaves less money on the table of the company’s investors and more on underwriters. That’s where direct listing helps.

Disadvantages

  • There is no real price discovery as the company evaluates the share price using its own internal methodology or with the help of financial advisers. It lacks interaction with investors which doesn’t help the company to understand the demand perspective.
  • All the shares are being offered by existing shareholders, not the company, in order to cash out their position. Hence all the money received from the offer will go to investors’ accounts instead of the company account. So, it is not good for those companies who want to raise capital from the public.
  • There’s no guarantee that available shares will be sold completely in the market.

Special purpose acquisition company

Consider SPAC as a moon. Like moon doesn’t have its own light, same way SPAC doesn’t have a value of its own. SPAC management also known as sponsors, raises capital through IPO and looks to acquire or merge with an operating company. You can think like this: An IPO is basically a company looking for money, while a SPAC is a money looking for a company.

  • SPACs broadens the investment option and provide easy accessibility to retail investors to participate in private markets.
  • SPACs can be attractive fundraising opportunities for young companies in particular, especially since smaller companies are usually private equity funds.
  • SPACs are a quicker way to list your shares on an exchange.
  • As most of the SPACs are run by experienced business investors, young companies can benefit from that investment expertise.
  • SPAC acquisition sometimes causes company owners to lose control over their company. It can also lead to conflict between the management and SPAC.
  • While the SPAC merger process does require transparency regarding the target company, so the due diligence of the SPAC process is not as rigorous as a traditional IPO.

TL;DR

  • Traditional IPO is expensive and a lengthy procedure.
  • Direct Listing is a good option in case a company has a famous brand in the market. But, here uncertainty hovers on capital raise amount.
  • SPACs take the least time among them, which reduces the time-risk. SPACs with excellent management teams can add visibility and generate interest among investors. It also gives an opportunity to retail investors to invest in public companies. With a SPAC the company has much, much more control. With a SPAC you could be public in two-months from when you start the process.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store