Author:
United States | Publication | March 2025
Amid the largely shutdown Initial Public Offering (IPO) market, fueled by global trade wars and market volatility, the conventional IPO process has grown increasingly difficult for companies seeking to go public. In the turbulent economic climate of today, regulatory hurdles, fluctuating investor sentiment and extended timelines make IPOs less attractive for companies.
Conversely, Special Purpose Acquisition Companies (SPACs) provide a quicker, more flexible substitute with upfront price discovery and effective regulatory approval. This alert looks at how SPACs enter the public markets, providing businesses – particularly in the tech and biotech sectors – a more cost-effective way to go public and generate capital.
Traditional IPOs follow a multi-tiered approach involving a coordination of underwriters, institutional investors and market analysts coupled with a cumbersome regulatory compliance procedure. Although historically the gold standard for corporate public listings, the growing volatility of the macroeconomic environment of today compromises the effectiveness of this mechanism. Trade conflicts, marked by erratic tariff levies, diplomatic strife and retaliatory economic policies, have further exacerbated market instability. This has resulted in a diminished investor confidence and increased governmental scrutiny.
US stock markets witnessed a notable drop on Monday, March 10, 2025 as investors reacted to President Donald Trump’s announcement on the immediate implementation of new tariffs on imports from China, Mexico and Canada, negating the possibility of additional negotiations. Significant declines were observed in the major US stock indexes. The Dow Jones Industrial Average decreased by 1.5 percent (approximately 650 points) to 43,191.24, while the S&P 500 declined by 1.8 percent to 5,849.72. The Nasdaq Composite experienced the most significant decline, plummeting 2.6 percent to 18,350.19, with technology stocks being the most affected. In the interim, the Russell 2000, which monitors small-cap stocks, experienced a 2.8 percent decline to 2,102.23.1
In today’s increasingly turbulent economic climate, and the heightened fears of a potential trade war, the prospect of taking a company public through a traditional IPO is becoming increasingly more challenging than before.
Beginning as an innovative circumvention to the traditional IPO, regulatory loopholes were the founding principle of SPACs. Prior to the emergence of SPACs, any organization that desired to go public would engage a bank to underwrite its initial public offering of stock through an IPO. The primary objective of a SPAC is to provide a private company with an alternative means of accessing public market. A shell company’s IPO initiates the life cycle of a SPAC. In order to finance their merger with the target company, each SPAC achieves an IPO share price of US$10. The private company’s market access is facilitated by the merger of the newly established publicly traded shell company (the SPAC) and the targeted private company. Following the merger of the publicly traded SPAC with the private company, the SPAC dissolves, leaving the former private company as the sole entity available on the public market under a new ticker.2
The price per share in a conventional IPO is subject to fluctuations based on market conditions and demand. Companies may be compelled to reduce their offering price in response to investor hesitancy, as IPO valuations are exceedingly susceptible to market sentiment. This vulnerability to external market forces increases the probability of inadequate capital raises, which results in liquidity constraints that impede post-listing growth and expansion strategies. SPACs, therefore, offer a pre-existing framework that expedites regulatory approvals, thereby removing a significant number of the procedural bottlenecks that are unique to IPOs. SPACs enable greater flexibility in deal structuring, including the capacity to negotiate favorable terms with investors prior to the completion of the listing process, in addition to providing a more efficient listing mechanism. Given these structural advantages, SPACs are a more adaptable and resilient model for a company that is going public in highly volatile economic conditions.3
The price discovery process in a traditional IPO typically occurs one day prior to the IPO, at the conclusion of a six-month process of going public. The underwriters typically undervalue the company to provide an advantage to their traditional institutional clients. In contrast, the price discovery process in a SPAC merger typically occurs upfront, typically upon the signing of a term sheet, and is a bilateral negotiation between the SPAC and the target. This process frequently results in a higher valuation of the company.
The main difference between SPACs and IPOs is their respective approaches of capital acquisition and timeframes. Usually taking 9 to 24 months, traditional IPOs expose businesses to a range of outside economic changes that could compromise valuation and lower investor appetite. The regulatory load related to IPOs, comprised of extensive SEC additional filings and compliance measures, further extends the time period it takes for a company to go public. On the other end of the spectrum, the likelihood of negative market conditions derailing the public listing process is significantly reduced by choosing to execute a SPAC transaction within a six-month window.
For businesses with great potential, like biotech and some tech companies, a SPAC merger is an especially good choice. For these types of companies, traditional IPOs provide major challenges, as such companies with great potential are not yet profitable, making them less appealing to IPO investors, who typically give companies with established revenue top priority. Moreover, the fact that biotech companies are often in the research and development stage and are also running in high-risk industries where success is not guaranteed further adds to investor hesitation. The IPO process—long-standing, expensive and subject to market volatility—complicates the fundraising activities even more. With a turnaround time of six months, many biotech and tech companies thus decide to circumvent these challenges by using SPAC mergers, which offer a more flexible and expedited route to public markets.4
One prime example of a company going public via a SPAC in 2020 is Clover Health.5 Through a merger with Social Capital Hedosophia Holding Corp. II, it was able to land US$1.4 billion despite its lack of profit margin. Notwithstanding the challenges that followed the merger, this strategy allowed Clover to raise money and grow at a period when a traditional IPO seemed unlikely.
DraftKings’ journey as a public company began in late 2019, when it went public through a merger with a SPAC. The deal marked the company’s debut on the NASDAQ under the ticker symbol DKNG. By merging with a SPAC, DraftKings was able to avoid the conventional IPO process and grow to be rather successful. DraftKings has defied all since its public premiere.6 Posting a 285 percent return since the merger, DraftKings has greatly exceeded its rivals. Currently ranking second in performance among the best SPAC-born stocks, it is among the top-performing gaming stocks; just behind Vertiv Holdings, a provider of digital infrastructure. The stock has shown volatility despite its strong performance; its peak-to-trough drop from March 2021—when it peaked at US$72— to August 2022—when it dropped to roughly US$10.50. Still, the stock has recovered strongly and as recently as March 2025 it is close to US$50. This amazing comeback has confirmed DraftKings as among the best-performing gaming equities, particularly in the iGaming and online sports betting sectors, where DraftKings competes in a duopoly with FanDuel.7
SPAC sponsors will often raise debt or private investment in public equity (PIPE) funding in addition to their original capital to not only finance the transaction, but also to stimulate growth for the combined company. The purpose of this backstop debt and equity is to guarantee the successful completion of the transaction, even if the majority of SPAC investors redeem their shares. Furthermore, a SPAC merger does not necessitate an extensive roadshow to pique the interest of investors in public exchanges (although raising PIPE necessitates targeted roadshows). Sponsors of SPAC are frequently seasoned financial and industrial professionals. They may utilize their network of contacts to provide management expertise or assume a role on the board.
Although SPACs have been the subject of scrutiny for their potential for overvaluation and flexible reporting standards, they continue to be a critical and efficient tool for companies seeking public capital. The drawbacks sometimes cited against SPACs—including limited due diligence and pro forma projections—should be seen in light of the benefits SPACs offer over conventional IPOs.
Critics contend that SPACs are susceptible to inflated valuations due to the excessive scope for speculative projections they allow. Nevertheless, pro forma projections are indispensable for emerging companies that possess disruptive innovation and limited historical performance. In a traditional IPO, historical performance is predominantly considered. In contrast, SPACs allow companies to provide forward-looking projections, thereby being more attractive to such investors who attach premium to a company’s long term economic performance and growth. The problem is not the projections themselves, but rather the necessity for enhanced regulatory oversight to guarantee transparency—a matter that the SEC’s new regulations are attempting to resolve.
A common trend that has been observed in the context of SPACs has been instances of inadequate vetting, as manifested by the Stable Road-Momentus merger.8 However, this does not render the entire SPAC model flawed. Misrepresentations and accounting fraud have also been the cause of due diligence failures in numerous IPOs, not just SPACs. The advantage of SPACs is their capacity to expedite the process of conducting due diligence, thereby reducing red tape and facilitating the efficient introduction of companies to the market. The process will only improve as a result of the SECs’ new measures, which require greater disclosure, rendering SPACs an even more appealing option.
Given the increasingly erratic economic environment of today, the prospect of going public with a conventional IPO seems more difficult than ever. Businesses eager in capital raising have to carefully evaluate their options among ongoing global trade conflicts, increased market volatility and regulatory uncertainty. SPACs have acquired great momentum even if IPOs have long been the traditional way for businesses to go public. Given the geopolitical and particularly economic conditions of today, SPACs are a more practical, flexible, and effective alternative for conventional IPOs.
Special thanks to law clerk Mariam Syed for assisting in the preparation of this article.
1 Stock Market Today: Live Updates, CNBC (Mar. 3, 2025).
2 SPACs & Merger Insights, MNA Community.
3 Why Choosing a SPAC Over an IPO Makes Sense, KPMG (2022).
4 Why Some Biotech Companies Are Turning to SPACs, The Motley Fool (July 28, 2020).
5 Clover Health to Raise $3.7 Billion in SPAC IPO, Industry Leaders Magazine (Jan. 7, 2021).
6 DraftKings, One of Best-Performing deSPAC Stocks, SPAC Conference (June 14, 2024).
7 The Death of SPACs, Michigan Journal of Economics (Apr. 2, 2024).
8 The Death of SPACs, Michigan Journal of Economics (Apr. 2, 2024).
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