How to Go Public The SPAC Way

September 23rd, 2020

Special purpose acquisition companies, or simply SPACs, have been around since the 1990s, but didn’t gain traction until 2010, when going public via this route became a fast track to listing success.

Today, SPACs have become more popular and even a formidable rival to the typical route of initial public offerings (IPOs). In fact, this year, we’ve seen more than 50 new SPACs in the U.S. alone raising some $40 billion, following a record high in SPAC IPO capital raising in 2019.

In our last DiffuseTap session, our guest Jeff Gary, Director and CFO of Fusion Acquisition Corp., shed light on this phenomenon. DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas). If you want to make new friends and connect with experienced professionals from our VC ecosystem, email us at


Why SPACs Rival Traditional IPOs

A SPAC is an empty shell company formed with one target in mind: To raise capital through an IPO, in order to acquire an already existing private company.

Also known as “blank-check companies”, SPACs, as Jeff explained, allow a private company to go public “more quickly, more efficiently, with less cost, and more certainty” than the  traditional IPO process. But perhaps one of the biggest distinctions of SPACs is, unlike an IPO or private equity, the seller will roll out a significant amount of their equity and retain majority control. In other words, the current owners and management team remain in place and participate in the future upside of the public stock price.

According to Jeff, there are several advantages to going public with SPACs as compared to going through the traditional IPO route:

  1. Private companies can retain as much ownership as they want. This allows the company to retain their momentum without hindrance and to pursue any long term goals that were already put in motion.
  2. SPAC deals cost less. IPO fees are more expensive, and this becomes an important factor for companies looking to go public when a set dollar figure is yet to be established, therefore minimizing losses out of any potential risk.
  3. There is more valuation certainty since you negotiate with only one party and the SPAC and company agree on valuation and deal structure in advance of going public. This significantly simplifies the effort of publicly listing as compared to a traditional IPO route.

“With a SPAC, in negotiating the valuation which you determine up front at the time of the public announcement, you’re only negotiating with one party. In a traditional IPO, it’s like herding cats. You have BlackRock and Franklin coming in, trying to muscle their way in, but you’re trying to herd 100 ambassadors together, to get 100 people to decide to invest in your IPO and at what price. So it’s much more efficient from the investor and certainty standpoint with a SPAC.”


How to SPAC in 3 Steps

“In a SPAC deal, there are really three separate steps to the life of a SPAC.. First, you need to raise what’s called risk capital. Second, you do the IPO. Then finally, you announce a deal.”  

Just three months ago, Fusion raised $350 million on IPO, and now they are looking to merge with a fintech or a financial service company with a valuation of $1 billion to upwards of $10 billion. Jeff shares insights into the SPAC process:

1. Pay Risk Capital

The first step for a SPAC to buy a company is to pay the risk capital. That is you pay upfront for the underwriting commission and legal expenses.

“For instance, if a SPAC plans to pursue a $300 million IPO, they will need to raise 2% to pay the commission at $6 million, plus another $2 million to pay for legal expenses. Later on, the SPAC, risk capital investors, and management get a 20% share of that $300 million company. So in essence, they get $6 million in shares, plus warrants to buy stock at a 15% premium.”

If no deal gets done, then all of those shares are revoked. Therefore, the SPAC team is incentivized to getting a good deal done.

2. Go Through the IPO

After raising the initial risk capital, a SPAC goes through the IPO process to raise its initial   capital with the goal to merge with a private company. The IPO investors normally pay $10 per share and that capital then goes into a trust which cannot be touched until a merger with a target company is approved by the IPO shareholders.

For example, Fusion raised $350 million three months ago via IPO. Once they sent that money to trust, it could not be touched until Fusion presented a merger candidate to its shareholders and they approved it. The typical SPAC deal structure is for investors to buy a “unit” or a share of common stock, and also get an option to buy half a share of common stock at a 15% premium. The warrant provides additional upside as an incentive which will trade separately.

“It’s usually within 18 to 24 months of maturity if we do not get a deal done. If no merger gets done, then that $350 million is returned, and investors get their $10 a share back plus any interest income. They keep their warrant which they can sell on the market.  This way, there’s very little downside from the IPO investor’s standpoint.”

3. Announce the Deal

After raising enough capital and engaging with a prospect company, the SPAC announces the deal. This includes publicly disclosing the terms and the dollar amount of the transaction.

How about shareholders? They are offered an option to veto or opt out of the deal and get their money back. Shareholders get to vote on two things: (1) Do they want to stay in the deal? (2) Do they approve of the deal?

“It’s a free call option to get a look at a deal, know the transaction, and decide if they want to participate or if they want their cash back. Basically, if they choose to redeem their shares at $10, or if the deal doesn’t get approved based on votes, then they get their money back. So again, they have no downside in the transaction.”


The Verdict: SPAC > IPO

The goal of a SPAC is to buy a great company at a discount to public comps, resulting in the stock appreciating, citing the recent deals that went down with DraftKings, Nikola, and Virgin Galactic. A unit for DraftKings, for instance, sold at $10 at its IPO and near that level until they announced the deal. A unit now trades at $54.

“Shareholders get a free call option to be able to invest. You can also buy a SPAC in fintech services, in industrials, in technology, or whichever sector. This allows them to build a portfolio and invest in public stocks early on of great companies, and the outcomes can be very rewarding.”

Investors would do well to dip their toes in the SPAC pool as an alternative.  Also for private companies this is a more efficient way of going public with higher valuation and deal certainty. As Jeff expertly illustrated in our DiffuseTap session, when investing in a SPAC, there is simply no downside.


Meet the Speaker

Jeff Gary is an independent board director, audit committee chair, investor, and entrepreneur with over 30 years of experience. This includes being a team leader and Senior Portfolio Manager at BlackRock, AIG and Avenue Capital.  Currently, he is a Board Director and CFO of Fusion Acquisition Corp., a publicly listed SPAC listed on the NYSE. Fusion is a blank-check company formed to unlock shareholder value, by identifying an acquisition target in the fintech or asset and wealth management sectors with a value of $1 billion $10 billion.  He is also a Board member or Advisor to three Fintech companies and on the Board of National Holdings (NASDAQ: NHLD).

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