The stock market is a marketplace for investors and institutions to buy and sell stocks, shares, equities and securities. It also allows companies to raise capital through the public for future ventures. Almost every country has a stock market where companies can float their businesses on the ‘open market’ for people to buy. In the case of this article, we will be focusing on the UK and US markets. Companies will often choose to float their business on a stock exchange, like the LSE, NYSE, or NASDAQ. Each market has its own set of terms and conditions and works slightly differently. For a company to go public it will need to ‘list’ its business on a stock exchange. There are a few ways to do this, but the most common are IPOs and DPOs with SPACs also becoming popular as of recent. So, what is the difference?

IPO – an Initial public offering is the most common way for a business to list its shares on the stock exchange. In an IPO, new shares are created and then underwritten by an intermediary party, such as an investment bank and institutional fund. The bank/fund will help the company through its IPO ensuring regulatory requirements are met and investors are present through their diverse distribution networks. To ensure that the company can raise the money it needs the investment bank/fund may offer a pre-IPO where a large number of shares are sold to a hedge fund or private equity firms for a sustained period to ensure that the IPO on the open market doesn’t flop. A lot of work goes into an IPO and therefore they cost a lot of money.

DPO – a direct public offering, also known as a direct placement, is another way for a company to go public. Companies wanting to raise money can go directly to the exchange and just list their shares on the market, new shares will not be issued so no dilution will take place. Doing this can save the company a lot of money in the run-up to the offering as they’ll cut out the heavy bill of an investment bank. In a DPO the company will have to provide all the paperwork and relevant information to the governing body and exchange. A DPO has multiple benefits such as lower fees, and no dilution for existing shareholdings. However, it does have its cons, it’s somewhat harder to raise money as the existing shareholders are hoping for capital appreciation to then sell on and invest as no new shares are offered. Because it’s a direct listing, large funds could have an influence on the price depending on how they buy on the open market.

SPAC – A Special Purpose Acquisition Company is formed to raise money through an IPO to buy another company. SPACs can become rather complex but in recent years some big businesses like Virgin Galactic have raised money through a SPAC operation. When a SPAC goes public quite often, they don’t have any business operations but simply use the raised money by investors to acquire another private business. Money that is raised in the IPO is kept in a trust account while the director of the SPAC aims to acquire businesses, contracts and more. By law, SPACs have 2 years to complete an acquisition or they must return their funds to the investors. SPACs are often created to allow deals that could not be possible by single investors.