Special purpose acquisition companies (SPACs, or “blank check” companies), which are shell companies set up with the sole purpose of raising funds through an initial public offering (IPO) to acquire an existing target company, have seen a dramatic rise in the past year. High levels of liquidity and persistently low interest rates, coupled with a growing appetite among investors for higher-yielding investment opportunities, have fuelled the rising interest in SPACs. According to resource website SpacInsider, which tracks these investment vehicles, 248 SPAC IPOs were completed in the last year alone, raising US$83 billion, compared with 216 from 2009 to 2019. This article discusses the features of SPACs, its benefits and risks, trends in Asia as well as the future for SPACs in Singapore.
How SPACs work
SPACs are shell companies usually formed by sponsors with expertise in a particular industry or business sector, with the intention of pursuing deals in that area. At the time of their IPOs, SPACs have no existing business operations or stated targets for acquisition. Once the IPO raises capital, the funds raised are placed in an interest-bearing trust account until such time that the SPAC’s sponsors identify a target (usually, a private company looking to go public through a merger or business combination). Once a target company is identified and a merger is announced, the proposed merger (also known as a de-SPAC) is put to a vote by SPAC shareholders. The SPAC’s investors can either swap their shares for shares of the merged entity or redeem their SPAC shares prior to closing of the de-SPAC transaction to get back their original investment, plus the interest accrued while that money was in trust. SPAC sponsors typically receive about a 20% stake in the merged entity with nominal invested capital. SPAC sponsors also have a deadline by which they must find a suitable deal, typically within about two years of the IPO. Otherwise, the SPAC is liquidated, and the IPO proceeds are returned to the public shareholders.
Benefits and Risks
SPAC IPOs have several benefits over traditional IPOs, as set out below:
a) Faster time to market – a SPAC listing can be completed in six weeks, versus about six months or more for a traditional IPO. The expedited timeline is a key advantage given that there is no certainty as to what market conditions will be like six months down the road – especially if stock markets are near record highs and are vulnerable to crashing.
b) Lower Transaction Costs – SPAC transactions are cheaper than a traditional IPO, which involves more paperwork and a more rigorous vetting process. Unlike in a traditional IPO, there is also no need to pay underwriting fees in a SPAC IPO.
c) Greater certainty in pricing – SPACs offer target companies greater certainty about how much funding they will receive. In a traditional IPO, there is no such certainty as the amount raised depends on the pricing of the IPO by investment bankers, which is in turn based on their judgment of what the market will pay for shares in the company.
d) Lower entry barriers – SPACs have the advantage of being able to bypass the usual requirements of traditional IPOs such as the need for a financial or operating track record.
e) Leverage on experienced sponsors – SPACs have the ability to leverage on the management expertise of an experienced sponsor to help the target company grow its business.
f) Opportunity for retail investors to participate in early stage, high growth companies – From the retail investors’ perspective, SPACs present the opportunity for them to participate in private-equity type investments (usually reserved for accredited or institutional investors) via a publicly traded security.
Despite its benefits, SPACs are not free of inherent risks and dangers. Some of the criticisms commonly made against SPACs are:
a) Lack of Disclosure / Transparency – From the perspective of the investors, it is worth noting that the due diligence/disclosure process of the SPAC listing is not as rigorous as that of a traditional IPO. Given that there is little financial information, no clear business plan or operating track record for investors to rely on, retail investors would be largely reliant on SPAC sponsors, with whom they have limited familiarity.
b) Unattractive Value Proposition – Investors should be aware that they are, in effect, subsidising SPAC sponsors, who will receive their stake in the merged entity with nominal invested capital. This would mean that the stock price of the merged entity would have to do extremely well for investors to profit from the de-SPAC, while the sponsors stand to benefit even if the stock price disappoints.
c) Lack of incentive on the part of sponsors to secure the best deal – The risk to investors may be compounded by the fact that sponsors are tasked with identifying a workable acquisition target and completing the merger within a two-year timeline – this could result in sponsors proceeding with a low-quality target company or overpaying for such target. Arguably in these circumstances, sponsors may not be sufficiently incentivized to secure the best deal possible for the SPAC.
Market Trends
While the craze for SPACs has thus far been centred in the US, this interest in SPACs now appears to be shifting towards Asia, with the shift being fuelled by the large number of unlisted unicorns in the region, include the ride-hailing, delivery and digital payments companies Grab and Gojek and e-commerce giants Lazada, Tokopedia and Bukalapak.
In Asia, only South Korea and Malaysia currently allow SPACs to list. Bourses in Hong Kong and Singapore appear to be taking divergent approaches towards SPAC listings. The Hong Kong Exchange, one of the world’s top IPO destinations alongside New York and Shanghai, has long been skeptical about non-traditional IPO listings, citing concerns over companies’ ability to access IPO funds without proper scrutiny, and has in recent years been tightening its rules on backdoor listings and shell activities.
On the other hand, the Singapore Exchange (SGX) has, amid growing interest in SPAC listings, launched a public consultation on 31 March 2021 to seek market feedback on a proposed regulatory framework for SPAC listings on its Mainboard. This follows an earlier round of consultation in 2010, during which time there was insufficient appetite for such offerings among businesses and investors. Feedback from the market is presently being sought on various aspects of the proposed regulatory framework including (i) the broad admission criteria for the listing of SPACs (such as minimum market capitalisation and minimum IPO price requirements), (ii) minimum equity holding and moratorium related conditions for sponsors, management team and controlling shareholders of SPACs and (iii) prescribed requirements that a business combination transaction by a SPAC (i.e. a de-SPAC) would have to meet.
Future of SPAC Listings in Singapore
The listing of SPACs looks to be a promising option which could open the way for the SGX to revive investor interest in Singapore’s stock market, which has struggled to attract big-ticket IPOs and suffered a string of de-listings in the last few years. However, for Singapore to realise its potential as the regional hub for SPACs, regulators must strike the right balance that effectively safeguards investors’ interests against the concerns posed by the unique features of SPACs, while meeting the capital raising needs of the market.
For More Information
If you have any questions about this Alert, please contact Leon Yee, Krishna Ramachandra , any of the attorneys in our Singapore office or the attorney in the firm with whom you are in regular contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.
