In order to understand what IPOs and SPACs are, it is first critical to understand the difference between public and private companies. Privately owned companies are owned by a smaller group of people where revenue numbers do not need to be made public, whereas publicly owned companies have shares that anyone can buy and sell on an exchange. Public companies also need to disclose information such as their revenue to their shareholders. A shareholder is anyone who owns a piece of stock in the company. IPOs and SPACs are two different methods of helping to convert a privately owned company into a public company.
IPO stands for initial public offering. Almost all companies are looking to grow, and IPOs are one way to transition into a larger company. What is important to understand is that in order to have an IPO, or to “go public” as it is commonly referred to, a company will usually be operating on a larger scale and is reliable when it comes to reporting gains and losses. The local, family-owned pizza place down the street is not likely to be going public anytime soon, but a major tech company looking to rival its competitors will be.
In order to get a sense of which companies are the type to go public, here are some of the more notable IPOs in recent years. In 2012, Facebook had a massive IPO round where they were able to raise $16 billion. More recently, Uber raised $8 billion in its IPO in May 2019. Tech companies are not the only ones going public recently — in 2010, one of the largest car manufacturers in the world, General Motors, had an IPO that debuted with shares trading at $33 each.
IPOs are the more traditional way to take a company from private to public; however, there has recently been a boom in SPACs as a new way to take a company public. SPAC is an abbreviation for Special Purpose Acquisition Company. Unlike a more traditional company looking to go public, such as GM or Facebook, where they sell a product or a service, a SPAC will not sell goods or services — it is created only to acquire other companies with the goal of taking them public. People investing in a SPAC are relying on the people finding the companies to find a viable candidate to take public. When a SPAC raises money through an IPO, that money will be used with the sole purpose of being used toward acquiring a company that will eventually be brought public under the SPAC’s name.
SPACs are popping up in the news seemingly everyday, and they’re often headlined by a celebrity or famous name. The list of celebrities who have been involved with a SPAC includes: Shaq, Steph Curry, Alex Rodriguez, Ciara, and Odell Beckham Jr.
Often these celebrities’ involvement is merely an attention grabber, as there are often, but not always, financial and industry experts working behind the scenes to ensure success. Similar to how when an athlete is promoting a product it does not necessarily mean that you should buy it, just because a celebrity is investing in a SPAC does not mean it will be a good investment. Just ask yourself: Do the Mike Trout Subway commercials make you more likely to buy Subway?
Now that you know how IPOs and SPACs function, you will be able to do more than just simply nod along and pray that your financial advisor isn’t squandering away your hard-earned money; instead, you will be able be educated on the subject and able to think critically about how your money is being spent.
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