IPO vs SPAC Founder Control Retention: Designing Dual-Class Share Structures and the Controversy

The SEC’s 2024 final rule on SPACs, effective 31 January 2025, reclassified the blank-check vehicle as an issuer for the purposes of the 1933 Securities Act, subjecting de-SPAC transactions to the same liability standards as traditional IPOs. This regulatory convergence, codified in SEC Release 33-11265, directly impacts how founders design control retention mechanisms—specifically, dual-class share structures—across both listing routes. For Hong Kong-based issuers and cross-border sponsors, the choice between an IPO and a SPAC is no longer a binary trade-off of speed versus liability; it is now a structural decision about voting power durability and the enforceability of founder lock-ups under U.S. securities law. This article examines the mechanics of dual-class share design for U.S.-listed issuers, comparing the IPO and SPAC paths through the lens of founder control retention, and addresses the ongoing controversy surrounding the long-term shareholder value implications of multi-class equity structures.

The Regulatory Framework for Dual-Class Shares in U.S. Listings

The NYSE and NASDAQ both permit dual-class share structures, but the specific listing standards and the evolving stance of institutional investors create distinct constraints. NYSE Listed Company Manual Section 313.00 and NASDAQ Listing Rule 5640 both prohibit any issuance or corporate action that would materially reduce or restrict the voting rights of existing holders without a shareholder vote. This “one-share, one-vote” floor applies only to reductions in voting power, not to the creation of unequal classes at the time of listing.

NYSE and NASDAQ Listing Standards Compared

NYSE Section 313.00 requires that any amendment to a company’s charter that would disparately reduce the voting power of a class must be approved by that class’s holders. NASDAQ Rule 5640 is substantively similar but applies a broader “public interest” standard, giving the exchange discretion to deny listings where the structure “raises concerns regarding corporate governance.” As of Q1 2025, the SEC has not issued a formal rule banning multi-class structures, but SEC Chair Gary Gensler’s public statements—most notably his 2022 speech on “The Promise and Peril of Special Purpose Acquisition Companies”—have signaled increased scrutiny of sunset provisions and founder-voting arrangements.

The Role of the SEC in Multi-Class Governance

The SEC’s 2024 SPAC rule (Release 33-11265) does not directly regulate dual-class shares, but it indirectly constrains them. Under the new rules, any de-SPAC transaction that involves a founder-promoter receiving a class of shares with superior voting rights must disclose, in the proxy statement filed under Rule 14a-101, the exact mechanism by which those rights are granted and the conditions under which they might lapse. Item 21 of Schedule 14A now requires a detailed table comparing the voting power of each class before and after the business combination, with the economic interest of the founder separately broken out. For IPO issuers, the equivalent disclosure appears under Item 10(b) of the 1933 Act registration statement (Form S-1), specifically the “Description of Capital Stock” section.

Founders pursuing an IPO on the NYSE or NASDAQ typically design a dual-class structure through the issuer’s constitutional documents, usually a BVI or Cayman Islands memorandum and articles of association (M&A) for offshore holding companies. The key variable is the ratio of superior voting shares—often Class B shares carrying 10 or 20 votes per share—to ordinary shares carrying one vote each.

Voting Ratio and Sunset Provisions

The median voting ratio for U.S. IPO dual-class structures in 2024 was 10:1, according to data from the IPO Center at the University of Florida’s Warrington College of Business. However, the trend is toward shorter sunset periods. In 2024, 38% of dual-class IPOs on the NYSE included a mandatory sunset provision triggered by the founder’s death or permanent disability, up from 22% in 2020. The most common sunset trigger is a time-based provision of 5 to 7 years from the IPO date, after which the high-vote shares convert to ordinary shares. This is a direct response to institutional investor pressure from groups like the Council of Institutional Investors (CII), which has formally opposed indefinite dual-class structures since its 2018 policy update.

Lock-Up Agreements and Voting Trusts

Underwriters in IPO transactions typically require a 180-day lock-up period under Rule 10b-5 of the 1934 Act, during which founders cannot sell their shares. For dual-class structures, the lock-up applies to both the economic interest and the voting rights. However, founders can transfer voting rights through a voting trust agreement, which is permissible under Delaware General Corporation Law Section 218(a) for companies incorporated in that state, or under the equivalent provisions of Cayman Islands Companies Act Section 100 for offshore issuers. The voting trust must be disclosed in the IPO prospectus under Item 13 of Form S-1, and the trust’s duration is typically coterminous with the lock-up period.

SPAC transactions present a fundamentally different control retention challenge because the founder-promoter already holds a disproportionate ownership stake—typically 20% of the SPAC’s equity, known as the “promote,” for a nominal investment of USD 25,000. In a de-SPAC, the target company’s founders must negotiate the conversion of their existing control rights into the combined entity’s capital structure.

The Promote and Its Conversion Mechanics

Under the SEC’s 2024 rule, the promote is now treated as a “security” for liability purposes under Section 10(b) of the 1934 Act. In a typical de-SPAC, the promote is structured as Class B shares that convert into ordinary shares upon the business combination. The conversion ratio is set at 1:1, but the promote shares carry no superior voting rights—they are ordinary shares. To retain control, the target company’s founders must negotiate a separate dual-class structure within the combined entity, which is then included in the SPAC’s proxy statement filed under Rule 14a-101.

PIPE Financing and Voting Dilution

Private investment in public equity (PIPE) financing, which is used in approximately 85% of de-SPAC transactions (source: SPAC Research, Q4 2024 data), introduces a critical dilution risk. PIPE investors typically demand ordinary shares with full voting rights, and the PIPE subscription agreement often includes a “most-favored-nation” clause requiring the issuer to extend any superior voting rights granted to other investors to the PIPE holders. This effectively prohibits the creation of a dual-class structure that excludes PIPE investors. The only workaround is to structure the dual-class shares as “founder-only” shares that are explicitly excluded from the MFN clause, but this requires the PIPE investors’ consent and is rarely granted in practice.

The Controversy: Shareholder Value vs. Founder Control

The academic and regulatory debate over dual-class shares centers on the trade-off between long-term founder vision and short-term shareholder value. A 2023 study by Professors Cremers, Lauterbach, and Pajuste, published in the Journal of Financial Economics (Volume 147, Issue 2), found that dual-class firms underperform single-class peers by an average of 3.2% per annum over a 10-year period, but only in cases where the founder’s voting power exceeds their economic interest by a ratio greater than 3:1. This finding has direct implications for the 10:1 ratio commonly used in U.S. IPOs.

The Index Exclusion Risk

A practical consequence of the controversy is the exclusion of dual-class companies from major stock indices. S&P Dow Jones Indices announced in 2017 that it would no longer admit companies with multiple share classes to the S&P 500, S&P MidCap 400, or S&P SmallCap 600. FTSE Russell followed in 2018, and MSCI imposed a 5% voting rights threshold for inclusion in its standard indices. As of March 2025, the S&P 500 contains only 12 dual-class companies, down from 18 in 2020. For a Hong Kong-based issuer targeting a U.S. listing, this exclusion means that institutional investors who track these indices—such as BlackRock, Vanguard, and State Street—are structurally precluded from holding the stock, reducing the potential investor base by an estimated 30-40% (source: MSCI ESG Research, 2024).

The Hong Kong Parallel: HKEX Chapter 8A

The Hong Kong Exchange has taken a different approach. HKEX Listing Rule Chapter 8A, introduced in 2018 and amended in 2023, permits dual-class share structures on the Main Board but imposes a maximum voting ratio of 10:1 and a mandatory sunset provision triggered by the founder’s death or disability. The HKEX also requires that the weighted voting rights (WVR) beneficiary must be a director of the issuer, and the WVR shares must convert to ordinary shares upon transfer to a third party. This regime is more restrictive than the NYSE or NASDAQ rules, which do not mandate a sunset provision or a director requirement. For a company considering a dual listing between Hong Kong and the U.S., the HKEX’s Chapter 8A rules will dictate the structure, and the U.S. exchange will generally accept a structure that complies with HKEX standards.

Actionable Takeaways

Founders pursuing a U.S. IPO should negotiate a 10:1 voting ratio with a 5-year time-based sunset provision to satisfy both institutional investor demands and exchange listing standards, while accepting the S&P 500 index exclusion risk as a structural constraint.
In a de-SPAC transaction, the founder must secure a separate dual-class structure in the combined entity’s charter before the proxy statement is filed, as the PIPE financing MFN clause will otherwise preclude any voting power differentiation.
The SEC’s 2024 SPAC rule eliminates the liability advantage of SPACs over IPOs for control retention structures, making the choice between the two routes primarily a function of timeline and valuation certainty rather than regulatory arbitrage.
For Hong Kong-based issuers, a dual listing on HKEX under Chapter 8A and the NYSE/NASDAQ requires the dual-class structure to comply with the more restrictive HKEX rules, including mandatory sunset and director-ownership requirements.
The 3:1 economic-to-voting power ratio identified by Cremers et al. (2023) should serve as a maximum threshold for founder control design, as exceeding this ratio correlates with statistically significant long-term underperformance.