It is important to understand the significance of an acquisition corporation and its involvement in helping private companies go public. In this article, we discuss what exactly an acquisition corporation is, why companies use them, and how they are utilized for allowing private businesses to enter the public markets.
At a Glance:
· Acquisition corporations allow for a faster and more cost-effective route in order to take your company public on the Canadian markets.
· Acquisition corporations can allow management to retain greater ownership without the heavy dilution of shares than that of a traditional IPO process.
What Is an Acquisition Corporation?
An Acquisition Corporation is a company that is created solely to raise capital and take a private company public. They are also known as SPACs or Special Purpose Acquisition Corporations. From the perspective of private companies looking to go public, it is typically preferable to find an acquisition corporation that has little or no debt, which is often the case because acquisition corporations are often considered a "clean" shell company. In addition, the cash amounts within acquisition corporations vary anywhere from $100,000 to $1B+.
How The Process Works
When a private company gains control of an acquisition corporation via a share exchange, the owners of the private company exchange their shares for shares in the acquisition corporation. The shareholders of the private company will have now gained control over a majority of the stock of the acquisition corporation and are now ready to go public. This process is similar to what’s called a reverse takeover, however, unlike standard reverse takeovers, acquisition corporations come with a "clean" shell company and are essentially set up with an expert management team that searches for a target to acquire. This is contrary to pre-existing companies going public in a standard reverse merger and usually takes from 4 to 6 months to complete.
Why Use an Acquisition Corporation to Go public?
There are several reasons why using an acquisition corporation is beneficial when trying to go public, some of the main benefits being greater access to capital and reduced costs.
1) Access To Capital
Acquisition corporations give private companies access to capital and the ability to raise more funds if needed. Often times the founding team of the acquisition corporation AKA "The Sponsors" have either already raised the funds for the private business to utilize or are able to raise more money once the two companies have merged together.
Due to the fact that an investment bank and underwriters are not needed during the construction of the acquisition corporation, the costs to take a company public while using the vehicle becomes significantly less. The expediency and lower cost of the reverse merger process are largely advantageous to smaller companies in need of quick financing, as the method is less burdensome and allows management to focus on the growth of their business. Furthermore, going public with an acquisition corporation allow owners of private companies to retain greater ownership and control over the new company, which could be seen as an advantage to owners looking to raise capital without diluting their ownership.
To learn more about the alternative ways of going public in the Canadian markets, check out our previous blog post 5 Ways to Go Public in Canada, which breaks down the RTO process further.
If you have any questions in regard to how acquisition corporations work or how they can be used to take your company public on the Canadian markets, please reach out to Our Team of experts who will be more than happy to assist.