What is the difference between IPO, DPO & SPAC?

A company’s public listing is a defining event for its growth. While enterprises may go public for a number of reasons, its debut on stock exchanges adds to its visibility in the universe of publicly-listed companies.

The process are going public, however, is not fixed. Companies can opt for one of the several listing procedures available, depending on their funding needs and desired involvement in the listing process.

While an initial public offering (IPO) remains one of the most popular routes of public listing, the process of direct public offering (DPO) does not run far behind.

Apart from these two routes, companies have now increasingly started opting for a public listing by merging with a special purpose acquisition company (SPAC), to avoid the hassles of an IPO.

Let’s look into these methods in detail to understand why companies choose a particular listing option for going public.

Initial Public Offering (IPO)

IPOs generally allow private companies to welcome public shareholding, thus creating new capital from the stake sold.

Typically, an additional stake is “created” for public stakeholders, allowing them to invest in the corporate entity as stake-owners.

Despite its popularity, an IPO is often considered to be  a long-drawn process, with multiple players involved. The primary step is the appointment of a team of management professionals, underwriters, accountants, among others, to help the company meet regulatory requirements, and raise funds by invoking public interest.

One of the key players in this process is the underwriter. Even when the company is confident about raising as much funds as per its targets, it may end up being unable to do so. The underwriter, in that case, acts as the intermediary to allow the company to ascertain its offer price and even assume the risk of undersubscription by buying the remaining shares for a fee.

These entities later sell the balance stake via their distribution networks, which comprise mutual funds, brokers or insurance companies.

These equity underwriters, generally banking and financial institutions, also work closely with the private company in the overall IPO process, such as holding roadshows, to draw investors’ attention to the company.

Apart from active engagement with underwriters, companies also work closely with accountants, auditors and regulatory body experts for due diligence on the company’s operations and financial position. Results from this process are published as a primary disclosure for investors interested in the stock.

Also read: How To File An IPO In Canada?

The company also publishes a red herring prospectus, following regulatory approval, to give a detailed account of its operations and financials to the public, allowing it to make an informed investment decision.

A company’s IPO is then opened for a few days, where interested investors can buy shares of the company as per the price band set by the company. The allotment is done in close consultation with IPO professionals, who also help fix the stock’s listing price on its debut on the exchanges.

However, companies who wish to avoid the hassle of this procedure opt for the direct listing offer route.

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Directing Public Offering (DPO)

For companies not looking to raise additional capital, or those avoiding the dilution of existing shareholders’ stake, pick the DPO route, also known as direct listing, as it allows them to bypass the many hassles of an IPO.

Under this method, the company puts its existing stake up for sale to the public, thus acting as its own underwriter. It also saves fee expenses by not involving several intermediaries for its securities’ sale.

The private company gets the flexibility to set its terms of sale independently, with less regulatory restrictions, which generally include operational history, incorporation details and financial record of the private firm.

An interest aspect of this method is the issue period, which may go from a few days to a few months. DPO-listed companies may also not be necessarily listed on exchanges for public trading.

While stock exchange listing provides greater exposure, many DPO-listed companies trade via over-the-counter (OTC) market platforms, which are meant for small companies or those with an illiquid stake.

Several companies, including Spotify (NYSE:SPOT, SPOT:US), are known to have opted for this method. Spotify’s DPO was launched in April 2018.

Special Purpose Acquisition Company (SPAC)

Companies pick this method when they wish to raise new capital by issuing shares, but without the challenges of holding an IPO. This is done by almost handing the entire task to a special purpose vehicle with the sole purpose of raising funds to invest in a private company.

A SPAC is a publicly listed shell company incorporated solely for the purpose of holding an IPO and being merged with an existing private entity, to take the target company public. Its operations and financials hold zero to no value because it does not participate in any business activity.

The entity is created by capital sourced from pool of experienced investment professionals, who aim to raise funds via an IPO while roping in investment banks, underwriters, among other intermediaries.

Disclosures regarding the professionals' investments and background are highlighted in the IPO prospectus, apart from details on the revenues and operational background. However, these hold less significance in a prospectus.

Interestingly, subscribers to such an IPO rely largely on the investors’ prowess while buying stake in the SPAC.

Later, the proceeds from the IPO are kept in a trust fund for a certain period until the SPAC identifies a target company to merge with, allowing it to go public with the funds raised.

The stakeholders are allotted equity stake in proportion to the stake purchased in the SPAC.

However, if the SPAC is unable to find a target company within the stipulated period, the company is dissolved, and the funds raised are returned to the investors after deducting some IPO-related fees.