SPAC vs. IPO: Two Roads to the Public Market

A company can reach the public market by the traditional IPO or by merging with a SPAC. The destination is the same — a public listing — but the mechanics, timeline, and risks differ meaningfully.

What is a SPAC?

A Special Purpose Acquisition Company (SPAC) — also called a "blank-check company" — is a shell company with no operations. It raises money in its own IPO for a single purpose: to find and merge with a private company, taking that company public. The SEC describes a SPAC as moving through two distinct stages: a shell-company stage (the SPAC IPO and the search for a target) and a de-SPAC stage (the merger that produces an operating public company).

SPAC public shares are typically sold in $10 units, each often bundling a fraction of a warrant. The bulk of the IPO proceeds — generally on the order of 85–100% — is placed in a trust account. If the SPAC fails to complete a merger within its window — usually about two years, sometimes extended to two or three — it must liquidate and return the trust cash to shareholders.

The flow:

1. A sponsor raises a SPAC and lists it publicly, holding the cash in trust.
2. The SPAC hunts for a target — a real operating company. Listing rules generally require the target to represent at least 80% of the trust's assets.
3. The SPAC and target announce a merger (the de-SPAC), often alongside a PIPE (private investment in public equity) to top up capital.
4. SPAC shareholders vote and may redeem their shares for cash; the merger closes and the target becomes a public company.

Redemption rights and the trust

The most distinctive investor protection in a SPAC is the redemption right. At the de-SPAC vote, public shareholders can hand back their shares for their pro-rata share of the trust — roughly $10 plus accrued interest — regardless of what they paid in the secondary market, according to the SEC's investor bulletin. In effect, a holder can vote yes on a merger and still take their cash back, which is why redemptions are decoupled from the merger vote and can be very high.

How they compare

The trade-offs

• Speed and certainty of price. A SPAC lets a company negotiate its valuation upfront with one counterparty, rather than discovering it in a volatile roadshow. The de-SPAC route also historically let targets market themselves with projections and forward guidance — something the traditional IPO process largely discouraged — which made it attractive for early-stage or pre-revenue companies. As discussed below, the 2024 SEC rules narrowed that advantage.
• Dilution and cost. The sponsor typically earns a promote — customarily about 20% of the post-IPO shares, acquired for nominal consideration (often around $25,000 for founder/Class B shares). On top of the promote, free warrants and underwriting and advisory fees dilute further. Klausner, Ohlrogge and Ruan, studying SPACs that merged between January 2019 and June 2020, found the embedded dilution cost averaged $5.90 per pre-merger share (median $4.30) — leaving only about $4.10 of net cash (median $5.70) backing a nominal $10 share.
• Redemption risk. Because shareholders can redeem for cash before the merger, high redemptions can leave the combined company with far less capital than the trust implied. Average redemptions rose from under 5% in early 2021 to over 60% by the end of that year, with some deals exceeding 90%, according to the public record of the SPAC market. A PIPE is often used both to backfill that cash and to validate the deal's valuation with outside institutional money.

Boom, bust, and aftermath

SPACs went from niche to dominant and back in the space of a few years. In 2020, nearly 250 SPACs raised over $83 billion; 2021 set a record at roughly $162.5 billion across about 613 SPAC IPOs (averaging ~$265M each), far exceeding traditional IPO volume that year.

The cooling was just as dramatic. SPAC IPO proceeds collapsed to about $13.4 billion in 2022 and $3.8 billion in 2023 as redemptions soared. Post-merger performance was poor: SPACs that merged between July 2020 and December 2021 had a mean share price of $3.85 by December 2022 — a fall of more than 60% from the $10 reference — and underperformed traditional IPOs by roughly 26% on average.

The 2024 rules

On January 24, 2024, the SEC adopted final rules governing SPAC IPOs and de-SPAC transactions, broadly intended to align de-SPAC disclosure and liability more closely with a traditional IPO, according to the Harvard Law School Forum's summary. Key elements:

• Enhanced disclosure of sponsor compensation, conflicts of interest, and dilution.
• A board determination of whether the de-SPAC is advisable and in the best interests of the SPAC and its shareholders.
• A minimum dissemination period for disclosure documents before a shareholder vote.
• Removal of the PSLRA safe harbor for forward-looking statements (projections) in de-SPACs, and guidance that underwriters can be treated as statutory underwriters with potential Section 11 liability.

Together, the removal of the projections safe harbor and the underwriter-liability guidance narrowed the historical "use projections freely" advantage of the de-SPAC route, exposing both the forward guidance and the banks behind it to greater liability.

Which is "better"?

Neither is strictly superior. SPACs surged in 2020–2021 and then cooled sharply as many de-SPAC companies underperformed and regulators tightened disclosure rules. The traditional IPO remains the default for companies that can command strong roadshow demand; SPACs remain a tool for situations where speed, price certainty, or a complex story make the conventional path harder — but with the 2024 rules in force, the disclosure and liability gap between the two routes is narrower than it was at the peak of the boom.

Both are exit routes — ways a private investment becomes liquid public stock. The right one depends on the company, the market, and the terms on offer.

Sources & further reading

• What You Need to Know About SPACs – Updated Investor Bulletin — SEC (Office of Investor Education and Advocacy) / Investor.gov
• Special-purpose acquisition company — Wikipedia
• Final Rules on SPAC IPOs and De-SPACs — Harvard Law School Forum on Corporate Governance
• A Second Look at SPACs: Is This Time Different? — Harvard Law School Forum on Corporate Governance (Klausner, Ohlrogge & Ruan)