IPO, SPAC or Direct Listing: What You Need to Know About Going Public

By Lee Stettner

Going public provides companies with the capital they need to invest in future growth, employ top talent, and raise their profile. Today, there are more options than ever for taking a company public. For example, in 2020, 248 companies went public by merging with special purpose acquisition companies (SPACs). In addition, a growing number of companies — including notable examples Spotify and Slack — have chosen to pursue direct listings as a means to going public.

However, with more options comes more complex requirements and evolving expectations from shareholders. Management teams and financial sponsors need to know what to expect and prepare well in advance to successfully execute the transaction. Executives and owners must consider factors including capital and liquidity needs, valuation expectations, public perception, ESG metrics, and more.

Whether your company pursues an IPO, SPAC or direct listing, you will need to craft precise capital markets, investor relations, and public relations strategies to help ensure success. Below, find out what you need to know about each path to going public.

IPO

The most traditional path to going public, an initial public offering (IPO) offers many benefits. While pursuing an IPO, companies build a team that supports them in nearly every way:

  • The investment bank underwriting team supports the overall transaction through sales and marketing support, as well as ongoing analyst research coverage.
  • Communications professionals assist the company in developing and executing investor relations (IR) and public relations (PR) strategies. In addition, communications teams can guide the company through test-the-waters meetings, create awareness around the IPO, develop a specific listing-day PR strategy, and help the company tell a strong ESG story.
  • A capital markets advisor is key to helping the company choose the right investment bankers and advise on timing and planning the overall IPO. The capital markets advisor also helps organize the road show and setting the company’s valuation.

In addition, companies must develop a compelling, consistent message and strong relationships with key analysts and investors. These elements are critical in positioning the company for success leading up to, during, and after the IPO.

Overall, the IPO process can be long and arduous, and factors outside of the company’s control can generate uncertainty and impact the valuation. However, choosing to pursue a traditional IPO allows a company to build a strong support system that will guide them through that complex process.

SPAC

A special purpose acquisition company (SPAC) is essentially a shell company established by investors. The SPAC raises money through an IPO with the sole purpose of acquiring a private company. Through the merger transaction, the private company is made public.

Because these transactions involve a private company merging with a public company, they don’t have the same communications limitations as traditional IPOs. That means companies can market more effectively, provide more data around forward-looking projections, and tell their story to the media and investors. For investors, that means greater opportunity to interact with management teams and enhanced transparency around the transaction.

SPAC transactions also have their downsides. Unlike IPOs, SPACs aren’t supported by a robust team of investment bankers, sales forces, and client networks. These transactions can also be more dilutive to existing shareholders than IPOs, and SPACs don’t always attract the same level of near-term analyst coverage as traditional IPOs.

However, they can and should be supported by a team of communications professionals. Because SPACs can actively promote their transactions, they must have a comprehensive and well-planned communications strategy. IR and PR experts can help those companies communicate their message, target the right investors, and proactively market the transaction through the media.

Direct Listing

Through direct listings, companies list their shares on a public stock exchange without using underwriters. This can enable management teams to avoid the “IPO discount” used to attract institutional investors in IPOs. While this is a less common strategy, it’s being seen more and more.

To move forward with a direct listing, a company first files a registration statement with the SEC, then may hold test-the-waters meetings. The company then goes through a quiet period, and can then hold an investor road show and investor day. Once the registration is declared effective, investors may sell their shares; however, the share price is not determined by underwriters, but rather, by buyers and sellers.

Any of these three paths will ultimately lead you to the public markets. However, it is important to understand the differences, so you can communicate your story effectively, meet any regulations and requirements, and set your company up for ongoing success.

Whichever path you choose, you will need a comprehensive investor relations and public relations strategies. Learn the keys for success in our eBooks, “Investor Relations Primer: The Basics of an Effective Plan” and “PR 101: A Guide for Today’s Public Relations.”