In this guide, you will learn the following:
What is a SPAC?
How does SPAC work – from SPAC to de-SPAC
Why SPAC listing instead of a traditional IPO
Shortcomings of SPAC listings
The proposed framework of SPAC listings in Singapore
Introduction
Despite being around for decades, SPACs has gained popularity and news coverage in recent years, catching the attention of companies looking to raise funds, investors and regulators alike.
Grab, a dominant force and household name in Southeast Asia, is looking to go public in the US through the biggest ever SPAC merger which aims to raise around US$4 billion. Other Southeast Asia tech unicorns like Traveloka and Property Guru are considering going public via SPACs. Singapore-based firms such as Turmeric Capital, Novo Tellus Capital and Temasek-backed venture capital firm Vertex Holdings have also indicated interest to raise capital by way of a SPAC listing in Singapore.
The growing popularity of SPACs has not gone unnoticed by the Singapore Exchange (SGX) and other Asian exchanges such as those in Hong Kong, Indonesia and Japan, which are now considering amending their legislations to allow for the listings of SPACs.
Currently, SPAC listings are not permitted in Singapore. The SGX is considering implementing a SPAC listing framework and its proposals on the SPAC listing framework have not been finalised.
Is SPAC listings necessarily the cheaper and faster way to raise funds? In Part V of this guide, we set out briefly why this may not be the case.
I. What is a Special Purpose Acquisition Company?
A Special Purpose Acquisition Company (SPAC) is a company listed on the stock exchange with no prior operating history, no underlying commercial operations and no assets at the time of listing.
It is formed with the sole purpose of raising capital through an initial public offering (IPO) for the purpose of combining with a private company (business combination) which has not been identified at the time of the listing of the SPAC.
One attractive feature of a SPAC is that its shareholders can sell their shares back to the SPAC at a proposed business combination. This right is also referred to as a redemption right and can be seen as a “full satisfaction or your money back” guarantee.
II. Who forms SPAC?
Generally, a SPAC is established and initially funded by experienced founding shareholders who are often referred to as sponsors.
Investors invest in shares of a SPAC based on the expertise and proven track record of the founding shareholders and the management team of the SPAC, and based on the profile of the founding shareholders.
III. How Does SPAC Works - from SPAC to de-SPAC
A SPAC must identify and complete a business combination with a target private company within a specified timeframe from the listing date.
In most cases, upon a successful business combination, the operating business of the target company “takes over” the listing status of the SPAC and as a result, the SPAC is “de-SPAC”. Hence, the business combination process is sometimes referred to as the “de-SPAC transaction”.
Upon completion of the business combination, the resultant group/issuer continues to be listed on the stock exchange.
In some countries, SPACs are given up to three years to complete a business combination. In other countries, SPACs are given up to 2 years to get their acts together. SGX is considering a timeframe of 3 years from the listing date. However, the sponsors may voluntarily specify a shorter timeframe to complete the business combination.
If the SPAC does not complete the business combination by the end of the specified timeframe, the SPAC will be liquidated and the proceeds raised from the IPO will be repaid to the shareholders.
Generally, once a target company is identified and a business combination is announced, the SPAC’s shareholders may vote to approve the transaction, or vote against the transaction.
If the business combination is approved by shareholders, there will be a share swap such that shares in SPAC will be swapped for the shares in the target company. Following this, shareholders of the target company will hold shares in the SPAC.
If the proposed business combination is rejected by the SPAC shareholders, the SPAC may choose to continue the search for a new target company or to wind-up the SPAC and return the principal investment to shareholders.
An illustrative diagram on the life cycle of a SPAC with a given timeframe of 2 years
IV. Why SPAC listings instead of IPO
(i) Shorter time to market
A SPAC listing is a faster and more simplified process compared to that of a traditional IPO. A SPAC which is commonly a newly formed company with no operational history or commercial operations, requires less disclosure and due diligence work. A SPAC listing can be completed in as little as 8 weeks, compared to the typical 6 months to 1 year (or even longer) needed for a traditional IPO.
(ii) Lower underwriting fees
In a SPAC listing, an underwriting discount of 2% of gross proceeds are paid up on the closing of the SPAC IPO, with a remaining 3.5% payable upon de-SPAC. If a de-SPAC fails, this remaining 3.5% may instead be used to redeem the shares held by public investors.
This works out lower than the typical underwriting discount of between 5% to 7% of the proceeds which are delivered on the closing of a traditional IPO.
However, the cost is only lower when the level of redemption by shareholders of a SPAC is low. For most SPACs listed in the US, there is a high rate of redemption by shareholders. When there is a high rate of redemption by the shareholders, the SPAC will only get to keep a fraction of the IPO proceeds. In the end, the underwriting fees collected at a SPAC listing will turn out to be a higher percentage of the net IPO proceeds.
(iii) Forward-looking projections
In a traditional IPO, the listing issuer can only disclose historical financial statements to avoid any legal liability if forecasts are not met.
On the contrary, a SPAC can issue circulars to shareholders seeking approval for the proposed business combination which include forward-looking statements. The ability for a SPAC to market the business combination using financial projections is a key feature of de-SPAC transactions.
Nonetheless, it is pertinent to ensure that all forward looking statements in the circulars are true and accurate as the founding shareholders, directors and proposed directors are likely to be required to provide a responsibility statement by the SGX.
(iv) Valuation and market risk
In a traditional IPO, the underwriters set a range for the offer price but that range moves depending on the book-building process and depending on the market condition which can be very volatile. As a traditional IPO process takes a longer time, it is often harder to “time” the market and easier to miss the “right window” to list.
In a SPAC listing, the target company has more control over its valuation as this is set through direct negotiation with the sponsors of the SPAC and set out in the agreement for the business combination.
(v) “Money back guarantee”
By giving the shareholders a right to redeem their shares in the SPAC at the business combination stage, shareholders are assured that they could still get back their principal investments couple of years down the road from listing. This feature is lacking in a traditional IPO.
However, a high level of redemption can work out to be detrimental to the remaining shareholders, as seen in SPACs in the US. When there is a high redemption rate, the issuer will need to obtain additional financing to complete the business combination, risking further dilution to remaining shareholders of the issuer.
To address the above concern, SGX has proposed for redemption rights to be limited to independent shareholders who voted against the business combination which is eventually completed. If this is the case, the limited redemption rights will also need to be set out in the constitution of the SPAC.
V. Shortcomings of SPAC listings
Despite the potential benefits, SPAC listings also have their shortcomings.
(i) Opportunity cost
There is no guarantee that a SPAC will be able to identify a suitable target company and successfully complete a merger within the pre-determined period, which will result in the liquidation of the SPAC.
Although investors can have their investments (to be kept in escrow) returned to them in the event of liquidation of the SPAC, investors would have lost the opportunity to invest in other investments with potentially higher returns.
(ii) Inherent uncertainty
The merger with the SPAC is subject to the approval of the SPAC shareholders. The circular to shareholders for the proposed business combination must contain prospectus level disclosure on certain key areas, including the financial positions and compliance history of the target company. Extensive due diligence must be carried out to ensure that such disclosure is accurate.
There is a possibility that even after a significant amount of time and effort has been spent on due diligence and negotiations, the proposed transaction will eventually be rejected by the SPAC shareholders.
(iii) Supply and quality of target company
As the popularity of SPACs continues to rise, there may be too many SPACs and not enough quality companies to acquire. This, coupled with the time constraints set for de-SPACing may result in SPACs rushing to acquire any viable company including those of poorer quality, even at the expense of shareholder value. Ultimately, this may lead to a potential loss of investment for investors after the business combination.
(iv) Reduced regulatory scrutiny
In a traditional IPO, the management team and controlling shareholders of a listing group with operating history are required to make full and frank disclosure, allowing investors to make fully informed decisions. Depending on the rules of the relevant exchange, such standard and extent of transparency may be lacking in a business combination process.
SGX has proposed to mitigate this risk by requiring the circular for the business combination to comply with the prospectus disclosure requirements under Part XIII of the Securities and Futures Act, and include disclosures on key areas such as: (i) the financial position and operating control of the resulting issuer; (ii) the character and integrity of the incoming directors and management of the resulting issuer; (iii) the compliance history of the resulting issuer; (iv) the resulting issuer’s possession of material licenses, permits and approvals required to operate the business; and (v) the resolution and mitigation of conflicts of interests.
VI. The Use of SPACs in Singapore
As at this date, Singapore has not implemented the SPAC listing framework.
SGX issued a public consultation on the proposed SPAC listing framework on 31 March 2021. The results of the public consultation are still being reviewed and no further updates have been provided.
However, given that other major Asian players are also looking at implementing regulations to allow for SPAC listings to attract investors, there will be some pressure on SGX to implement a SPAC listing framework soon.
VII. The Proposed SPAC Framework in Singapore
In formulating a proposed framework for the listing of SPACs in Singapore, the SGX had conducted a review of key requirements for the listing of SPACs in the US and other jurisdictions with similar frameworks such as Canada and Malaysia.
The key proposals by SGX on the SPAC framework are set out in the table below.
The above proposals are not final and are subject to change pending the results of SGX’s public consultation.
Some Thoughts:
It is a delicate balance between having regulations to manage certain risks presented by SPAC listings and imposing too many requirements which ultimately reduce the attractiveness of SPAC listings.
While each regulatory authority seeks to protects the interests of minority shareholders of SPACs by having the certain safeguards in place, it also needs to ensure that such safeguards do not result in “over-regulation” of SPACs listings, making it unattractive for sponsors and investors to list in the particular country.
It will be interesting to see the final framework on SPAC listings approved by the SGX, and whether it be well-received by investors and interested sponsors.
Prepared by Avant Law LLC
Avant Law LLC is a law firm in Singapore specialized in capital markets and mergers & acquisitions. For more information about us, please visit us at https://www.avantlawllc.com/
Disclaimer
This guide is solely for informational purposes only. It is not intended to be or nor should it be regarded as or relied upon as legal advice. Please do not act or refrain from acting based on anything you read on this guide. Avant Law LLC does not accept and fully disclaim responsibility for any loss or damage which may result from accessing or relying on this guide.
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