SPACs and Direct Listings

A traditional IPO is not the only way to go public. Special purpose acquisition companies and direct listings offer different routes, each with its own risks for investors. Here is how they work.

SPACs: the blank-check route

A special purpose acquisition company (SPAC) is a shell company that goes public with no business, usually selling units at $10 each. The money sits in a trust while the sponsors search for a private company to merge with, typically within about two years. When a deal is announced, SPAC shareholders can vote on it and choose to redeem their shares for their slice of the trust instead.

SPACs boomed in 2020 and 2021, and many of the companies that went public this way later fell far below $10. Sponsors often receive a large stake for a small investment, which can dilute other shareholders. The SEC tightened disclosure rules for SPACs in 2024.

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