In an IPO, or initial public offering, a company makes an offering and an investment bank or other underwriter purchases the stock and makes it available to the public. The underwriter helps set the IPO price, assesses the level of interest in the stock, and manages all regulatory issues. A primary benefit of an IPO for the company making the offering is that the underwriter, charging a fee for its services, will usually either guarantee the sale of a certain number of shares or offer to purchase any shares that remain unsold. Having all regulatory issues managed and obtaining a guarantee of shares sold is a substantial benefit to offering companies, especially where demand for shares is not fully known.
When a company wishes to save the cost of hiring an underwriter or feels that an underwriter’s services are not required, it can register to sell its stock directly to the public via a direct listing. In doing so, a company and its stakeholders can avoid the lockup period of an IPO and resell additional shares on its own timetable. Without an underwriter, however, direct listings can be riskier in that there is no support for the initial stock price and no one to purchase unsold shares or make a market in the stock.
A SPAC, or special-purpose acquisition company, is a publicly traded “blank check” pool of capital with no operations, other than a small handful of executives and advisors who seek to consummate a “de-SPAC merger transaction.” These “blank check” companies look to acquire an unspecified target within a defined period. The target, once acquired, bolsters the stock price of the SPAC by the addition of its value. The time elapsed from commencement of negotiations to public trading is typically shorter for a SPAC than for a traditional IPO.
A PIPE, or private investment in public equity, deal involves the purchase of publicly traded stock, by a private investor (hedge or mutual fund, often), at a price below that available to a public investor. Typically, vast amounts of stock are purchased at a preferred price. Because only a small handful of purchasers are involved (the private investors), companies look to PIPE deals to raise substantial amounts of capital in a brief time frame to finance a de-SPAC merger transaction. PIPE deals are often employed to bridge part of the gap between the proceeds in trust held by the SPAC and the enterprise value of the combined company that will be the result of the de-SPAC merger.
