The blank-check vehicle known as a SPAC exploded onto the radar in 2020 – 21, only to fizzle in 2022. Traditional IPOs carried on, slower but steadier. At first glance, both routes funnel companies from private to public markets. However, the differences in process, cost, disclosure, and post-listing dynamics are significant.
This article compares the two, questions common assumptions, and explains what comes next for issuers and investors. The choice between these pathways is about recognizing the fundamental trade-offs that can define a public debut.
SPAC sponsors raise capital by selling units (one share plus a fraction of a warrant) to the public at a fixed price, typically $10, with minimal pre-deal due diligence. They usually have 18 – 24 months to find an acquisition. Once a target is found, shareholders vote on the deSPAC merger, and the combined entity trades under the target’s name.
In this structure, the SPAC sponsor is essentially saying, “Trust me, I’ll find something good,” while investors are betting on the management before seeing the business.
Traditional IPOs start with an issuer and underwriter drafting a registration statement and conducting extensive accounting, legal, and commercial due diligence. After SEC review – sometimes through several comment rounds – the issuer goes on a roadshow, with pricing based on investor demand and underwriter feedback.
The Speed Factor
SPAC formation through IPO listing typically takes two to three months. Sponsors allocate 20% of post-IPO equity as “promote,” and underwriters charge about 2% of gross proceeds for the IPO portion, with additional advisory fees at deSPAC. When a target is found, sponsors negotiate a business combination, secure PIPE investments, and pay more advisory fees.
A traditional IPO takes about six to nine months. Underwriting spreads average 7% for deals under $100 million (falling to about 5 – 6% for larger transactions), with more costs for roadshows and due diligence.
No warrants are issued in a traditional IPO, so dilution stems only from the new equity sold to public investors.
While SPACs appear to have a fee advantage (2% versus 7%), the 20% sponsor promote and warrant dilution eliminate most cost savings.
Traditional IPOs use book building. Underwriters assess institutional interest, adjusting price and size to meet demand. Pricing reflects live demand, and a first-day “pop” can signal underpricing or pent-up interest. Throughout 2023, the average first-day return on U.S. IPOs was 15%. However, median returns tend to fall after lock-ups expire.
SPACs list at a fixed $10 or $20 per unit, with investors initially placing trust in the sponsor rather than assessing the target’s financials. Actual valuation arrives only at deSPAC, with PIPE investors having already negotiated entry prices – public investors must decide to approve the merger with limited access to forward guidance.
The Valuation Paradox
In a traditional IPO, price discovery happens in the open market. In a SPAC, it occurs privately between institutional parties, with retail investors eventually asked to approve a deal in which they had little negotiating power.
SPAC dilution comes from three main components:
Combined, these can lead to 25 – 30% dilution in the pro forma equity value post-deal. If a SPAC raises $200 million, pro forma equity might reach $260 million pre-deal, delivering about 23% dilution for early investors.
Traditional IPO dilution equals the new shares offered as a portion of the post-IPO float. For example, a $500 million offering on a $5 billion pre-deal value results in 9.1% dilution. No warrants or hidden promote further dilute shareholders.
Comparing Dilution
| Structure | SPAC | Traditional IPO |
|---|---|---|
| Sponsor Promote | 20% | 0% |
| Warrants | ~4.5% | 0% |
| PIPE Dilution | Variable | 0% |
| Total Dilution | 25 - 30% | 9 - 15% |
SPAC investors often face dilution more than double that of a typical IPO.
Traditional IPOs require extensive due diligence by underwriters, legal teams, and auditors. The SEC’s review process demands complete financial and risk disclosures. The final prospectus commonly exceeds 100 pages.
The IPO roadshow allows management to field questions and interact directly with institutional buyers.
SPAC IPOs, on the other hand, file a generic mission statement (for example: “acquire a U.S. technology company”). The SEC reviews the SPAC’s registration, but no target-specific due diligence is done until an acquisition is announced. Detailed disclosures only come when the deal is proposed, and investors in the SPAC initially buy into a shell entity.
Traditional IPO issuers can price shares based on known financial information and market models. In contrast, SPAC targets are often opaque before the merger, and projections may lean on non-GAAP metrics. Private targets may agree to aggressive forecasts to convince sponsors, leaving public investors to vote on uncertain forward financials.
This creates the risk of misaligned incentives. Sponsors need to complete a deal before the deadline; PIPE investors often negotiate preferred terms; retail SPAC investors may choose to redeem rather than vote for a uncertain merger.
Information for Investors
In traditional IPOs, investors analyze, model, and question management before committing. With a SPAC, the value is more speculative; the sponsor is compensated whether or not the deal is value-creating.
SPAC units trade from IPO listing until deSPAC, often drifting below NAV when prospects are uncertain. This situation can create arbitrage opportunities – for example, buying a SPAC at $9.50 and holding until deSPAC at $10 with additional warrants. If redemption rates exceed 25%, volatility rises and bid-ask spreads widen.
Traditional IPO shares are not tradable prior to listing. Once trading begins, liquidity depends on lock-up expiries and issuance allocation. Price discovery unfolds on the secondary market, with liquidity typically increasing over weeks.
According to Renaissance Capital, the 2023 median total return for SPACs was -12% one year post-deSPAC, versus +5% for traditional IPOs. Just 30% of SPACs managed to outperform the S&P 500 in their first year. In contrast, traditional IPOs tend to offer more consistent post-listing outcomes.
This consistency can be attributed to pricing discipline and stricter disclosure. SPAC deals may mask liabilities or include earn-out structures, while IPO issuers usually provide audited financials and direct forward guidance.
The Outcome Gap
SPACs have generally underperformed traditional IPOs by a significant margin, thanks to weaker incentives and less thorough price discovery.
Since 2023, SPAC warrants must be recorded as liabilities under GAAP (ASU 2021-01), introducing mark-to-market swings in quarterly earnings statements. This new standard can shift net income significantly as share prices change.
The SEC has proposed new rules to increase transparency, including longer post-deSPAC sponsor lock-ups, a two-year extension of deal periods, and tighter redemption rights. If enacted, these changes will reduce some of the cost advantages traditionally associated with SPACs.
Traditional IPO investors pay capital gains tax on post-lock-up sales. SPAC redemptions are generally taxed as redemptions rather than sales, which may have different implications depending on holding periods and deal structure. Investors should consult a tax advisor for details specific to their circumstances.
SPACs gained popularity as a quick route to public markets, but investors need to examine the underlying trade-offs. While the process is faster, it can involve meaningfully higher dilution, less price discovery, and lower long-term returns.
Traditional IPOs are more involved and time-consuming, but their approach to due diligence, rigorous pricing, and greater transparency have typically led to more consistent outcomes for both issuers and investors.
Issuers wondering about the right path should weigh more than speed:
Meanwhile, investors should recognize that SPAC and IPO investments present different risk-return profiles, stemming from foundational contrasts in incentives, transparency, and process.
Both SPACs and traditional IPOs offer paths to public markets, but they diverge sharply in timing, fees, dilution, and disclosure. SPACs can accelerate the process but introduce higher sponsor promote, warrant dilution, and information asymmetry. Traditional IPOs demand more rigorous due diligence and pricing discipline, resulting in steadier performance and lower dilution for public investors. Issuers and investors must weigh speed against transparency and long-term returns to choose the route that best aligns with their objectives.
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