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Good analysis from Matt Levine on how Social Capital Hedosophia Holdings Corp (SPAC trying to eliminate the headache of IPOs) is actually more expensive than going public.

> A final thing about SPACs is that they are so expensive. Banks charge a rack rate of about 7 percent for initial public offerings, though big sexy tech IPOs tend to be done more cheaply. SPAC sponsors compensate themselves rather more lavishly. Hedosophia's sponsor -- a Cayman Islands company owned by Palihapitiya and his co-founder -- invested $25,000 to found the SPAC. In exchange for that nominal payment, and their work on finding a company to take public, they get 20 percent of the SPAC's stock. (They are also are putting in another $12 million or so to buy warrants in connection with its IPO.) A 20 percent fee for taking a company public is just ... more ... than a 7 percent fee. And that's not even counting the 5.5 percent fee that Credit Suisse charged for taking Hedosophia public! Something like a quarter of every dollar that investors are putting into Hedosophia is going to compensate financiers for doing the work of (ultimately) taking a unicorn public, which is a funny way to make that process more efficient.

https://www.bloomberg.com/view/articles/2017-09-15/icos-vcs-...




I was confused by Hedosophia's value proposition after reading that earlier article as well, but NYTimes seems to do a better job of explaining it.

> "For all this, he takes a tidy fee: 20 percent of the $600 million. But if his company acquires a business five to 20 times its size through a reverse merger, he said, the fee is the same as or smaller than a banker’s fee — and it is all in stock, so unlike the banks, Mr. Palihapitiya’s interests are aligned with the company’s."

Ie, the banks charge 7% of the startup's IPO valuation, whereas Hedosophia's sponsors charge a flat 20% of the $600M, regardless of the valuation of the startup it buys. According to the above math, if Hedosophia reverse-merges with a $3B unicorn, the effective fee would only be 4%.


That's not correct. The bankers' fee is 7% of the money raised in the IPO, not of their total valuation.

Matt Levine addressed that one too: https://www.bloomberg.com/view/articles/2017-09-19/memory-mo... Can't see how to link into the article but if you ctrl-f Hedosophia you'll see his point.


Thanks for the link. I'll admit that I'm not an expert in IPO-finance, and I'm surprised that Andrew Ross Sorkin and Matt Levine are saying such diametrically opposing things. There's probably some nuance to their disagreement that I'm missing.


There is no one better than Matt Levine on things like this. No hype, no handwaving, no BS. Just build the deal in an Excel spreadsheet and understand how it works.


Well said.


Careful, it's not more expensive for the company, just the financiers. By investing in this SPAC, you're basically willing to 1) eat the fees to bring a unicorn public earlier, and 2) and actually participate in a potentially "hot" unicorn that you're trusting Chamath will find.

For the company, you get to go public at 1) just the reverse merger fees which is significantly lower than IPO fees, and 2) at less time than going public (basically 1-2 months for the merger to go through)


> it's not more expensive for the company, just the financiers

This is not how spreads work. (The problem is related to determining where the burden of a tax falls.)

If an investor is willing to pay $10 for a company, an IPO gives the company $9 and the banker $1. That same investor would pay $8 for 80% of what those $10 would have bought. The price to the company is, out the door, lower.

I’ll give the SPAC sponsors credit for beating the VCs and investment bankers at the fee game. They get a wider spread than the bankers. (IPO fees aren’t allowed, by law, to go to 20%.) And they get VC carry for what’s essentially a flip. Except it’s better than carry—there’s no hurdle! They could lose 80% of investors’ money and they’ll still get their 20%.

Disclaimer: I am not a lawyer. This is neither legal nor securities advice.




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