SPAC and Direct Listing

SPAC and Direct Listing: Alternative Paths to the Public Market

For a long time, the traditional IPO was the only path for a company to enter the public market. However, over the past decade, alternatives have emerged—Special Purpose Acquisition Companies (SPAC) and Direct Listings. These instruments have changed the landscape of capital markets, offering companies different paths to listing with various trade-offs.

SPAC: Structure and Mechanics

A SPAC (Special Purpose Acquisition Company) is a “shell company” that conducts its own IPO for one purpose only: raising capital to subsequently acquire a private company. After the merger, the target company becomes public, bypassing the traditional IPO process.

The structure of a SPAC includes:

• Sponsor (initiator) creates the SPAC and receives founder shares (usually 20% of the capital).
• IPO: The SPAC raises money from public investors by placing units (share + warrant).
• Trust account — IPO funds are held in a trust until the deal is completed.
• Target search — The SPAC typically has 18–24 months to search for a merger target (de-SPAC).
• Redemption right — SPAC investors can redeem their shares if they disagree with the deal.

SPAC vs Traditional IPO

Advantages of SPAC for the target company:

• Speed (3–6 months vs 12–18 for IPO),
• Price certainty (the price is fixed in the deal, not dependent on market conditions at the day of pricing),
• Ability to present projections (SPAC allows forward-looking statements, which are prohibited in IPO),
• Sponsor expertise (an experienced sponsor can add value).

Disadvantages and risks of SPAC:

• Dilution from founder shares (20%) and warrants,
• High redemption rates can leave the company without capital,
• Complex deal structure,
• Regulatory attention (the SEC increased scrutiny following the boom of 2020–2021),
• Reputation risk in case of failure.

Economics of the SPAC Deal

Sources of capital in the de-SPAC:

• Trust (money from the IPO, minus redemptions),
• PIPE (Private Investment in Public Equity — additional placement to institutional investors),
• Rollover equity from target shareholders.

Founder shares create misalignment: the sponsor is motivated to close any deal, even a bad one, in order to keep their 20%. This is an agency problem—a key risk for investors.

Direct Listing

Direct Listing is when a company enters the exchange without raising new capital. Existing shareholders simply gain the ability to sell their shares publicly. Spotify (2018) and Slack (2019) were the first high-profile direct listings.

Mechanics of Direct Listing:

• No underwriters,
• No roadshow,
• No lock-up periods for insiders.

The opening price is determined by the designated market maker based on supply/demand on the first day.

Since 2020, the NYSE and Nasdaq have allowed primary direct listings with simultaneous capital raising.

Advantages of Direct Listing:

• Saving on underwriting fees (7% of IPO proceeds),
• No dilution from the IPO discount,
• Equal access for all investors (no privileged allocations),
• No lock-up allows early investors to exit immediately.

Disadvantages:

• No guaranteed capital raise (although primary listings solve this),
• No price stabilization from underwriters,
• Suitable only for already known companies with a strong brand.

Comparison of Paths to Listing

Recommendations for Companies

Traditional IPO remains preferable for most companies, especially those requiring significant capital raise and lacking strong brand recognition. A SPAC may make sense for companies in emerging sectors (EV, space, fintech), needing speed and the ability to tell a story through projections. Direct Listing is suitable for established brands with minimal capital needs who wish to avoid dilution and fees.