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The way initial public offerings ("IPOs" to most of us) take place is undergoing some radical changes for the better. They've never been more accessible.
It's all thanks to the rise of the special purpose acquisition company, or SPAC.
These are "blank check" companies with no commercial operations. Instead, they're designed to go public with the purpose of acquiring a private company with their IPO funds.
In essence, SPACs "pull" a private company into the public markets, whereas traditionally, a private company was "pushed" into the markets by founders and underwriters.
The SPAC is a "route" to going public that's become wildly popular this year; I'll share some numbers in a minute.
If the trend continues, as I believe it will, it could very well overtake and supplant the "usual" IPO process in 2021. That dramatic increase is going to have a real bottom-line impact on more and more investors, radically increasing access to all kinds of investing opportunities.
So here's what you need to know…
Why SPACs Are So Popular Now
It rarely makes headlines, but sometimes, traditional IPOs go wrong.
They can be expensive, for one thing: The average cost of an IPO, once you factor in all the legal, accounting, underwriting, and listing outlays, comes out to about $750,000 – a lot of money to a startup. The process usually takes anywhere from four to six months, but it's not unheard-of for IPOs to be dragged out to 18 months or more.
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In fact, over half of the companies who decide to start the IPO process end up abandoning the process completely. Others settle for much less, like a debut on a smaller, less liquid global exchange.
There have been some spectacular failures over the past decade, like BATS Global Markets and WeWork. Of course, there's Facebook Inc. (NASDAQ: FB), too – even though it's off to the races now, Facebook had some well-documented, near-catastrophic "hiccups" with its IPO.
With all that said, these costs and pitfalls in no way, shape, or form negate the tremendous value in going public. Many companies that stage successful IPOs rake in vast amounts of cash that can help them grow the business for years.
IPOs aren't always easy for regular investors on the "other end" of the IPO process. Investors are bombarded with endless hype about multibillion-dollar IPOs. But come the big day on the Nasdaq or New York Stock Exchange, unless they've been in on the ground floor of these companies, investors find they're usually frozen out of the best prices – that is, if they're even able to get their orders filled.
That's why SPACs have caught on like wildfire; they're such a valuable vehicle for companies that want to bring their value to the public markets but don't want to risk or waste hundreds of thousands of dollars – and hours.
Even better, they're relatively straightforward for regular investors, too.
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I'm on the board of directors of a SPAC myself, 10x Capital Venture Acquisition Corp. (NASDAQ: VCVCU), which closed its IPO late last month and pulled in $175 million. 10x is planning to focus on acquiring high-growth technology and tech-enabled businesses in the consumer Internet, e-commerce, software, healthcare, and fintech sectors.
We've got plenty of company, as some of the market's most dynamic firms went public using the same kind of vehicles – DraftKings Inc. (NASDAQ: DKNG) and Virgin Galactic Holdings Inc. (NYSE: SPCE) to name just two. Just recently, used-car company Shift merged with Insurance Acquisition Corp. to become Shift Technologies Inc. (NASDAQ: SFT), a huge end-to-end e-commerce platform for buying and selling used cars.
SPACs were once a rarity, but this year, there have been 201 SPAC-driven IPOs, with an average size of more than $345 million. In fact, SPACs have accounted for nearly 50% of IPO activity this year.
And now that we've seen firsthand how powerful and successful they can be, I think SPACs are only going to increase on the road ahead. The 2020 "SPAC Boom" is the starting point for what's likely to be a wholesale transformation in the way companies go public and raise capital for years to come.
This explosive trend can't help but make IPO investing more accessible and easier for regular investors who no longer have to be "in the know" or an insider to own a piece of tomorrow's top-performing companies, the next Facebook, or Google, or Ford.
When you think of the massive profit potential in SPACS and other techniques that are newly available to the general public, like angel investing – another lucrative "get in on the ground floor"-type trend that's exploded in popularity lately – you can't help but conclude there's never been a better time to be an investor.