Editor’s note: Jim Verdonik and Benji Jones, Co-Founders of Innovate Capital Law discuss how to decide whether the hottest trend in capital raising – Special Purpose Acquisition Companies (SPACs) is right for your business
RALEIGH – This week Humacyte, a Durham biomedical company, a became the first Research Triangle based company to announce that it will go public by merging with a SPAC called Alpha Healthcare. WRAL Techwire reported that Humacyte says the deal will give it a $1.1 billion market cap, including $255 million cash and a valuation of $800 million.
After a year in which SPAC deals increased over 600%, the Triangle is now playing in the SPAC deal market.
So, is there a SPAC in your company’s future?
Let’s analyze this from two perspectives.
- Should your business become a public company?
- What’s the best way to become a public company?
Benji Jones, left, and Jim Verdonik. (Photo courtesy Innovate Capital Law)
Public Company Turnaround
According to Credit Suisse, the number of U. S. publicly traded companies decreased from a high of about 8,000 in the late 1990s to a low of about 3,600 in 2016, but currently about 6,000 companies trade on the New Your Stock Exchange and NASDAQ.
So, after a long steady decline in the number of publicly traded companies, we reversed course and the number of publicly traded companies has been increasing.
Whenever I see a trend reverse itself, I ask: Why?
What changed in 2016?
Several things have happened.
- Globalization of business and investments accelerated
- Information and Communications Technology has been centralizing industries
- Stock market valuations have increased dramatically
The public company rules haven’t changed, but more businesses are seeing advantages to being public.
OK, that’s what other businesses have been doing, but what about YOUR business?
Do you Want to be a Public Company?
That’s a very complex decision.
Ten Factors Deciding to Go Public
To help sort through the pros and cons of going public, the table below lists ten factors to consider. In each case, we have assumed that the business is ready to be a public company – that it has in place good:
- Accounting
- Financial controls and reporting
- governance
- IT systems
- HR
- Management team
We have rated each factor on a on a scale of 1 to 10 with a10 indicating that the factor is highly likely.
| TEN FACTORS TO CONSIDER IN GOING PUBLIC | PROS
(assuming company is ready to be Public) |
CONS |
| Access to Capital | 10 | |
| Cost of Capital | 10 | |
| Cash Out Investors | 5 | |
| Cash Out Management | 3 | |
| Acquire Other Companies Using Stock | 7 | |
| Branding/PR | 5 | |
| Transaction Expenses | (10) | |
| Annual Operating Expenses | (10) | |
| Liability Risk | (10) | |
| Secrecy | (10) | |
| TOTAL | 40 | (40) |
As you can see from the table, if we weight all ten factors equally on a scale of one to ten, it’s not clear that on average becoming a publicly traded company is either a smart move or a disaster.
But averages are deceiving. Average companies don’t exist.
Each business has very specific goals and resources and market appeal. For some businesses, access to capital and the cost of capital are high priorities that far outweigh the negatives of being public.
To help you decide what’s right for you, assign your own weights to each factor based on their importance to you.
Ten Factors in Deciding How To Become Public
Now, lets look at ten factors to consider in deciding which of three common ways to become a public company is best for you:
- Traditional IPOs
- SPAC Mergers
- Public Shell Company Mergers
I have omitted another way to go public from this analysis – the Direct Listing – because that is another whole article.
SPACs are a form of Public Shell Company, but generally have a LOT more money and much higher trading volumes than other non-SPAC public shells. SPACs are also usually backed by institutional investors. Non-SPAC public shells rarely attract institutional investors because of their low market caps and low trading volume.
Public Shells might be considered the poor man’s SPAC. I include them in this analysis, because early-stage companies that can’t do a traditional IPO or SPAC deal may be able to do a public shell merger.
Each of path has its own pros and cons.
| Traditional IPO | SPAC MERGER | PUBLIC SHELL MERGER | |
| Certainty will Close | Medium | Medium | Best |
| Valuation Certainty | Medium | Best | Poor |
| Transaction Speed | Slowest | Medium | Fastest |
| Transaction Expense | Most Expensive | Medium | Cheapest |
| SEC Hurdles | Highest SEC Scrutiny | Medium | Lowest |
| State Hurdles | Low Regulation | Low Regulation | Highest Regulation |
| Liability Risk | Medium | Lowest Risk | Highest Risk |
| Exit Event for Investors | Medium | Best | Poor |
| Exit Event for Management | Medium | Best | Poor |
| Cash Raised | Best | Medium (except that for the past year SPACs have more money) | Poor |
Our tables include a lot of generalizations. You can find more specifics on the four earlier SPAC Articles we wrote linked below or consult legal counsel.
Find out the Good, the Bad and the Ugly about SPACS.
Part 1
What’s a SPAC? And why are they the hottest deals going on Wall Street?
Part 2
Is Merging with a SPAC and Going Public Right for Your Business?
Part 3
How do You Choose the Right SPAC for Your Business?
Part 4
Watch how SPAC deal sausage is made.
https://wraltechwire.com/2021/02/16/whats-a-spac-part-4-watch-how-a-spac-deal-sausage-is-made/
Innovate Capital Law: https://innovatecapitallaw.com/
