SPAC vs IPO: Pros, Cons, Case Studies

The global IPO market is back in motion. In Q1 2025 alone, 291 IPOs raised $29.3 billion globally, marking a 20% year-over-year increase in deal value—a clear signal of renewed investor appetite and market confidence. As capital markets thaw, companies now face a pivotal decision: SPAC or IPO?

Choosing the right path to go public shapes your company’s growth trajectory, investor trust, and long-term resilience. While SPACs are resurging as a faster alternative (typically 3–6 months), IPOs continue to dominate in credibility-driven sectors such as healthcare, fintech, and AI.

Highlights:

• SPACs offer speed but come with dilution and post-merger volatility. IPOs provide greater stability backed by rigorous regulatory scrutiny.
• New SEC reforms demand greater SPAC transparency, narrowing the gap with IPO standards.
• Match your route to sector maturity, capital needs, and strategic objectives.
• Use virtual data rooms to facilitate capital raising, due diligence, and regulatory compliance.

What is a SPAC?

A Special Purpose Acquisition Company (SPAC) is a publicly traded company (“shell company”) created solely to merge with or acquire a private company, effectively taking it public without a traditional IPO.

Often called a “blank check company,” a SPAC has no commercial operations. It exists to pool capital from investors, identify a promising target, and execute a merger (a process called “de-SPAC”). SPACs surged in popularity post-2020 as an alternative path to public markets, particularly for high-growth startups seeking faster timelines and negotiated valuations.

How SPACs work: A step-by-step breakdown

Step 1: Formation & sponsorship

SPACs are launched by sponsors, typically seasoned investors, executives, or private equity firms. They contribute initial capital (usually 3–5% of the SPAC’s IPO proceeds) in exchange for founder shares.

These shares, often equating to 20% of the post-IPO equity (the “promote”), incentivize sponsors to secure a high-quality target. Best-in-class sponsors prioritize sector expertise (e.g., tech, energy) to align with investor expectations and reduce post-merger volatility.

Step 2: IPO & fundraising

The SPAC goes public, selling units (shares + warrants) to institutional and retail investors. Funds raised are held in an interest-bearing trust until a merger is finalized. Unlike traditional IPOs, SPACs don’t market a specific business model during this phase. Instead, potential investors bet on the sponsors’ reputations. 

Step 3: Target acquisition & due diligence

Sponsors vet potential targets, focusing on companies with scalable models, clear growth trajectories, and readiness for public scrutiny. Top sponsors mitigate risk by partnering with PIPE (Private Investment in Public Equity) investors, institutions like hedge funds, or venture capital firms. This helps to validate the target’s valuation and inject additional capital pre-merger.

Step 4: Merger process & public listing

Once a target is selected, shareholders vote on the merger agreement. If approved, the SPAC and target combine into a single publicly traded entity, with the target gaining immediate stock exchange access.

Post-merger, the new combined company must meet the U.S. Securities and Exchange Commission (SEC) reporting standards, often requiring upgraded financial controls and investor relations teams. Notably, sponsors’ founder shares dilute public investors’ equity—a trade-off for bypassing traditional IPO hurdles.

What is an IPO?

An Initial Public Offering (IPO) marks the first time a private company sells its shares to the public on a stock exchange, transitioning into a publicly traded entity. Unlike a SPAC transaction, which relies on mergers with a shell company, an IPO involves direct fundraising for an existing company through investor capital, governed by rigorous regulatory standards.

Established as the gold standard for companies to raise money since the 1600s (starting with the Dutch East India Company), IPOs remain the preferred route for companies prioritizing credibility, market-driven valuations, and long-term investor trust.

The traditional IPO process: A step-by-step breakdown

Step 1: Preparation & underwriter selection

Companies partner with investment banks (underwriters) like Goldman Sachs or Morgan Stanley to guide the IPO and conduct financial audits. Investment bankers assess the company’s valuation, financial health, and readiness for public scrutiny.

Top-tier firms conduct “dual-track” preparations, simultaneously planning for IPOs and potential acquisitions to maximize leverage. Critical prep work includes audited financials, governance structuring, and drafting the S-1 registration statement, a document disclosing risks, business models, and leadership details to the SEC.

Step 2: SEC review & roadshow

The S-1 filing triggers an SEC review, often lasting 3–6 months, where regulators demand clarifications on financial disclosures or operational risks. Concurrently, executives embark on a roadshow, pitching to institutional investors (e.g., pension funds, asset managers) to gauge demand and set a preliminary price range. Sometimes, roadshows are scheduled closer to the IPO date. For example, Reddit announced its pre-IPO roadshow on March 11, 2024, just ten days before its public listing on March 21, 2024.

Step 3: Pricing & allocation

Post-roadshow, underwriters finalize the IPO price based on investor feedback, balancing company valuation goals with market appetite. Then the private company issues new shares. Shares are allocated to institutional investors (who typically receive ~90% of offerings) and retail platforms. A “Greenshoe option” allows underwriters to sell 15% additional shares if demand surges, stabilizing post-listing volatility.

Step 4: Trading debut & post-IPO compliance

Shares debut on a public exchange like the NYSE or NASDAQ. The stock’s performance typically depends on market sentiment, earnings potential, and lock-up agreements preventing insiders from selling shares for 90–180 days. Post-IPO, companies must file quarterly reports (10-Q), annual disclosures (10-K), and adhere to SOX compliance.

Why IPOs endure: Stability in a volatile market

Initial Public Offerings (IPOs) continue to lead in sectors that prioritize transparency and regulatory compliance, such as healthcare and finance. The rigorous scrutiny associated with the IPO process often lends credibility to a company’s growth prospects.

In 2024, traditional IPOs demonstrated robust performance, with stock prices rising nearly 29%, outpacing the S&P 500’s 26% increase during the same period. This trend underscores investor confidence in companies that undergo the comprehensive IPO process.

Conversely, SPACs often face challenges, especially when initial investors opt to pull money from a SPAC. For example, according to Kellogg Insight, the median redemption (withdrawal of SPAC investment) rate among SPAC investors can reach 73%, and an additional 25% sold their shares on the open market, resulting in a total pre-merger divestment rate of 98%.

This widespread withdrawal signals a lack of investor confidence in many SPAC-backed deals, undermining the capital base and market stability of the resulting public companies. That said, historically, businesses have pursued both routes to raise capital in nearly an equal measure. Over the last 10 years, SPACs comprised 42% of the total U.S. IPOs.

Data rooms for IPO and SPACs

Overall rating:

The score is calculated as an average, derived from evaluations and the number of reviews on external review platforms.

4.9/5

Excellent

Check price

Overall rating:

The score is calculated as an average, derived from evaluations and the number of reviews on external review platforms.

4.8/5

Excellent

View Profile

Overall rating:

The score is calculated as an average, derived from evaluations and the number of reviews on external review platforms.

4.7/5

Excellent

View Profile

SPAC vs IPO: Pros and cons

Choosing between a SPAC merger and an IPO requires balancing speed, cost, risk, and long-term value. Below, we dissect key factors shaping this decision for private companies targeting public markets in 2025:

Critical insights and key differences

• SPACs excel in speed and valuation certainty but risk dilution (sponsors take 20% equity) and post-merger underperformance.
• IPOs demand patience and transparency but offer higher liquidity, institutional backing, and fewer conflicts of interest.
• 2025 trends. SEC reforms are narrowing the regulatory gap, requiring SPACs to disclose risks upfront, while IPO roadshows increasingly leverage AI-driven investor targeting.
• SPACs suit agile startups in hot sectors (e.g., AI, cleantech); IPOs reward established firms prioritizing credibility and stable growth.

Market trends influencing SPACs and IPOs in 2025 and beyond

Evolving regulatory environment

The regulatory landscape for SPACs and IPOs is undergoing significant transformation. New SEC rules now mandate SPACs to disclose sponsor compensation, dilution risks, and conflicts of interest upfront in merger filings. This move aims to align transparency with traditional IPO standards.

For instance, SPACs must now provide detailed projections and third-party valuations, reducing the “blank check” ambiguity that fueled post-merger volatility in 2021–2023. Meanwhile, IPOs face tightened scrutiny on ESG disclosures and AI-driven business models, with the SEC requiring explicit risk assessments for tech-dependent companies.

“Any AI-related disclosures should be focused and targeted on how a company’s current or proposed use of AI will impact its business strategy, operations, and prospects.” Reuters

Investor sentiment shifts post-2021 SPAC boom

Investor sentiment toward SPACs has shifted notably since the 2021 boom of the SPAC market. In 2024, SPAC IPOs raised a total of $9.6 billion, a significant decrease from the $163 billion raised in 2021. This decline reflects increased investor caution and a focus on profitability over hype. Despite the downturn, SPACs accounted for 28% of all IPO activity in 2024, up from 23% in 2023, indicating a sustained interest in this investment vehicle.

SPACs launched by year (2009-2024)

SPAC IPO count by year (2009-2024). Source: SPAC Insider

SEC regulations reshaping SPAC transparency

The new SEC’s reforms target the SPAC process. The aim is to increase transparency and align SPAC disclosures more closely with those of traditional IPOs, addressing inherent risks, such as rushed timelines or capital shortfall. Key changes include:

• Sponsor disclosures. SPACs must disclose sponsor compensation, background, fiduciary duties, and any material conflicts of interest.
• Fairness opinions. Disclosure of whether the board deemed the deal fair is required; if a third-party fairness opinion is used, it must be included.
• Dilution transparency. A SPAC combined entity must detail all sources of dilution (e.g., redemptions, warrants, PIPEs) and present tabular scenarios at various redemption levels.
• Projection scrutiny. SPACs must clearly distinguish historical vs. hypothetical forecasts and explain non-GAAP (Generally Accepted Accounting Principles) measures.
• Co-registrant liability. The private target becomes a co-registrant in the S-4, assuming liability and filing responsibilities akin to a traditional IPO.
• Minimum dissemination period. Prospectuses must be sent at least 20 days before shareholder votes.
• Financial reporting alignment. Target firms must follow IPO-equivalent audit, reporting, and significance tests.

For more information on new SPAC rules, check a comprehensive breakdown by KPMG.

When to choose a SPAC vs. an IPO?

The decision between pursuing a SPAC merger or a traditional IPO depends on your company’s growth stage, industry dynamics, and risk appetite. Here’s a strategic breakdown:

Choose a SPAC merger if:

• You’re in a capital-intensive industry (e.g., aerospace, electric vehicles) and need quick access to funding for R&D or infrastructure.
• Market volatility threatens IPO valuations. That’s especially relevant amid 2025’s uncertain interest rate environment.
• You prefer a negotiated valuation process over exposure to unpredictable public market pricing.

Choose a traditional IPO if:

• Your business is already profitable or has stable unit economics (e.g., SaaS companies with 30% + gross margins).
• Building long-term investor trust is essential, particularly in regulated sectors like medtech or fintech.
• Your management team can handle 12+ months of a conventional IPO process, regulatory scrutiny and the demands of a public roadshow.

SPAC example: Intuitive Machines

In February 2023, Intuitive Machines completed its SPAC merger with Inflection Point Acquisition Corp., facing notable financial headwinds. Although the deal was initially expected to raise $330 million, high shareholder redemptions slashed proceeds to just $55 million, and 30% of shareholders voted against the merger—a stark indicator of investor hesitation.

Contributing to this skepticism were delays in Intuitive Machines’ lunar mission schedule and continued EBITDA losses, which challenged market confidence. Yet, the company succeeded in securing critical growth capital and achieved a Nasdaq listing under the ticker LUNR, a significant milestone for a commercial space firm.

Leadership framed the deal not merely as a funding event but as a strategic enabler for accelerating its lunar lander program and broader ambitions in space infrastructure. Notably, the company adapted by pivoting its NASA CLPS mission to target the lunar south pole, a more scientifically and commercially valuable location.

The transaction underscores ongoing SPAC challenges, particularly redemptions and valuation skepticism. However, it also illustrates how SPACs can still deliver vital growth capital for frontier sectors like space tech when traditional IPO routes remain out of reach.

IPO example: Reddit

Reddit’s road to IPO was notably long and complex, spanning nearly three years from initial intent to public listing. However, its 2024 IPO exceeded expectations, with shares of RDDT surging over 250% post-debut, defying early skepticism. The stock’s momentum earned it spots on both the IBD 50 and Tech Leaders lists, signaling strong institutional interest.

In Q3 2024, Reddit reported a 68% year-over-year sales increase, alongside a surprise quarterly profit, fueling bullish sentiment across Wall Street. As of late 2024, 13 analysts rated the stock a “buy,” versus 7 holds, reflecting growing conviction in Reddit’s monetization strategy.

Reddit’s strong Q1 2025 earnings helped solidify post-IPO investor confidence. Daily Active Uniques (DAUq) grew 31% year-over-year to $108.1 million, while revenue surged 61% to $392.4 million, driven by robust ad performance. The company posted a net income of $26.2 million (6.7% margin), reversing a significant loss from the prior year.

Additional reading: Top 8 Companies Going Public in 2025: Key IPOs to Watch

Best Practices for companies considering going public

Conduct rigorous due diligence

Thorough due diligence is critical for both SPACs and IPOs. For SPACs, this involves vetting sponsors’ track records, scrutinizing merger terms, and stress-testing financial projections against industry benchmarks. IPOs demand audited financials, compliance reviews, and mock investor Q&As to preempt regulatory pushback.

Advanced analytics tools, including AI-driven risk assessment platforms, are increasingly used to flag inconsistencies in contracts or operational risks. Companies that prioritize cross-functional checks, spanning financial, legal, and operational teams, reduce post-transaction litigation risks and enhance investor confidence.

Align with seasoned advisors

SPACs require sponsors with deep sector expertise and a history of successful mergers, while IPOs benefit from underwriters skilled in pricing strategies and institutional outreach. Advisors should guide companies through nuanced challenges, such as SEC comment resolution or post-merger integration planning.

For SPACs, sponsors with operational experience (not just financial expertise) tend to better align target valuations with market realities. In IPOs, advisors versed in investor sentiment trends can optimize roadshow narratives, ensuring alignment with current market appetites.

Leverage virtual data rooms (VDRs)

Secure VDR platforms streamline document sharing and collaboration while maintaining compliance with regulatory standards. For SPACs, these tools enable real-time updates for PIPE investors and seamless due diligence with target companies.

Virtual data rooms for IPO centralize financial disclosures, legal contracts, and investor communications, reducing administrative delays. Advanced platforms offer AI-driven analytics to track stakeholder engagement, identify bottlenecks, and automate audit trails. Companies using VDRs with encryption and permission controls shorten transaction timelines, minimizing exposure to data breaches or regulatory penalties.

The bottom line

• SPACs offer faster public access (3–6 months) but risk sponsor dilution (20% equity) and post-merger volatility.
• IPOs demand SEC rigor (12+ months) but ensure credibility and attract institutional investors.
• Choose SPACs for capital-intensive sectors (e.g., AI, space) needing rapid funding; opt for IPOs if profitability and stability are priorities.
• New SEC rules mandate SPAC transparency on risks/dilution, aligning closer to IPO standards.
• Successful SPACs and IPOs rely on sector-experienced advisors, AI-driven due diligence, and adaptable post-public strategies.