In light of market developments, increased interest and potential M&A opportunities in the Asia Pacific, Singapore Exchange (SGX) has launched the Special Purpose Acquisition Companies Framework to introduce a new listing vehicle to the Singapore market. SGX believes that the introduction of spacs will generate benefits to capital market participants and become a viable alternative to traditional IPOs for fundraising in Singapore and the region. This special edition of SGX research series: 10 in 10 provides an introduction on spacs and its typical lifecycle.
1. What are special purpose acquisition companies (spacs)?
Spacs are formed to raise capital through initial public offerings (IPOs) for the sole purpose of acquiring operating businesses or assets. Such acquisitions may be in the form of a merger, share exchange or other similar business combination (BC) methods. Prior to an initial BC, spacs are listed investment vehicles with no prior operating history and revenue-generating business or asset at IPO.
A spac is generally established and initially financed by experienced and reputable founding shareholders, who are typically referred to as sponsors. These sponsors are usually considered the management team which forms the spac entity to acquire or merge with a private operating company.
Unlike traditional IPOs, spac listings typically have a shorter time to market due to the absence of business fundamental operations and financials at IPO. Spacs have no historical financial results to disclose, assets description, and minimal business-related risks at IPO. Investors will find more information on a spac’s target assets or businesses upon announcing a proposed BC agreement, which is a proposal to acquire or combine with an operating company.
At the point of IPO, a listed spac unit is usually made up of shares and fractional warrants held by the spac sponsor and public investors. At least 90% of the gross proceeds raised at a spac listing must be placed in an escrow account. The fractional warrants grant holders the right to buy a corresponding fraction of the shares from the company (post-BC) at a specific price in the future. Full warrants must be accumulated in order for them to be exercised.
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2. Why would an investor trade spacs?
Spacs enable an investor to participate in private equity arrangements — for example, companies at a fast growth stage of their lifecycle — in the form of a publicly-listed company. Based on an investor’s risk appetite and just like any other stocks, the investor can trade in the different stages of the lifecycle of a spac.
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Investing in a spac listing prior to BC can be typically seen as investing in the founding shareholders’ profile and abilities to identify companies and execute BC transactions. In Singapore, spac sponsors must complete a BC — also known as de-spac — within 24 months from IPO, with an extension of up to 12 months subject to fulfilment of prescribed conditions.
3. What is the structure of the resulting company after business combination?
Once a spac has announced a proposal to acquire or merge with a fully operating private company as part of its BC, shareholders have the choice to continue their investment in the combined entity or opt to redeem their investment, which is the pro-rated share of funds held in the escrow account. Shareholders will be able to vote on the proposed acquisition or merger at an EGM that they will be invited to.
The spac sponsor must ensure the acquisition target’s fair market value is at least 80% of the funds in the escrow account. If the acquisition target is larger than the assets of the spac, additional equity fundraising from other investors may be required such as private investments in public equities or “Pipe”. Pipe implies a private placement of securities of a publicly listed company made to institutional investors such as asset managers or accredited investors.
If the BC is approved, the spac and the acquisition target will be merged into a publicly-traded operating company or listed company. The shareholders of the resulting entity will consist of spac sponsors, public investors, target company’s shareholders and Pipe investors.
4. What are the key milestones of a spac lifecycle a shareholder should take note of?
After a spac listing, shareholders will need to take note of key milestones such as detachment of spac units into separately traded shares and warrants, issuance of shareholder circular on proposed BC once the sponsor has identified a target, spac redemption process, EGM to vote on the proposed BC, completion of BC and trading of the resulting issuer and exercise or redemption of warrants.
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5. What is the de-spac process and what happens at de-spac?
The spac sponsor must complete a BC (de-spac) within 24 months from IPO, with an extension of up to 12 months subject to fulfilment of prescribed conditions. Upon announcing their target, the spac sponsor will issue a shareholder circular detailing the proposed BC. An EGM for shareholders to vote on the BC can only be held at least 21 calendar days after the circular is published.
As part of the de-spac process, independent shareholders have the right to redeem their spac shares, regardless of whether they vote for or against the proposed BC. Shareholders’ redemption will only be successful upon the approval and completion of the BC.
If at least 50% of independent directors and at least 50% of spac shareholders vote in favour of the BC, the spac sponsor will work towards the completion of the de-spac process and the trading of the new entity. Shareholders need to note that after the BC, their shareholding may be diluted due to the entrance of other shareholders, which may include the Pipe or target company’s existing shareholders.
6. What is a spac warrant and what purpose does it serve?
Investors who successfully subscribe to a spac IPO will own spac units consisting of a share and a fractional warrant. Depending on the terms in the prospectus, the spac unit may be detached into shares and warrants automatically (typically 45 days after IPO day) or provide investors with the option to detach. Whole warrants must be accumulated in order to be exercised.
The warrants can usually be exercised within 30 days after BC is completed up to the warrant expiry date (typically five years after completion of initial BC unless the sponsor calls for warrant redemption or spac liquidation). The warrant holder will pay cash to exercise and convert their warrants into shares (typically at a 1:1 ratio). Shareholders have the option to hold on to their warrants even if they choose to redeem their spac shares. Warrants are not eligible for redemption and liquidation.
The spac warrant is intended to enhance the potential return to investors for agreeing to have their capital held in the trust or escrow account until the spac completes a BC. It provides the opportunity for investors to maintain equity exposure to the resulting issuer via the warrants even if they choose to redeem the shares for cash.
7. How are the funds in the escrow account managed?
The funds held in the escrow account (at least 90% of the gross IPO proceeds) can only be drawn down in the event of a BC, spac liquidation or other specific circumstances. Sponsors can only invest escrow account funds in approved investments. These may include cash or cash equivalent or short-dated securities. Spacs are required to provide quarterly updates (via SGXNet) on its cash utilisation in the escrow account.
If a spac sponsor fails to identify a target company and complete the BC within the permitted time frame, the spac undergoes a liquidation process. All assets of the spac, including all funds held in the escrow account, will be returned to shareholders on a pro-rata basis.
8. What are the risks involved in spacs investing?
Examples of risks of spacs investing include but not limited to:
Spac risk: A listed spac (prior to de-spac) has no operating history and revenue, and no basis for investors to evaluate the spac’s ability to achieve its business objective.
Sponsor risk: Investors will need to rely on the sponsor’s quality and execution track record to identify and acquire companies to enhance shareholder value.
Dilution risk: Additional funding from the sponsors, Pipe or other investors may potentially dilute an investor’s existing stake in the combined company.
Liquidation risk: Should a spac be unable to complete a BC within the allowed timeframe, the spac may be liquidated.
More risks specific to a spac can be found in the IPO prospectus or shareholder circular of the respective spac listing.
9. What are some investor safeguards in place for spacs investing?
SGX has implemented various safeguards to strengthen the alignment of interests between the spac sponsor and their independent shareholders, such as:
- Permitted timeframe to complete a BC;
- Moratorium for relevant shareholders;
- Requirement to place at least 90% of gross IPO proceeds in an escrow account;
- 50% cap on dilution from warrants;
- Redemption, liquidation and voting rights for independent shareholders; and
- 20% cap on spac sponsor’s promote shares that are sponsor’s entitlement to additional equity at nominal or no consideration at IPO.
- Investors should ensure they are familiar with the spac’s lifecycle to form their investment decisions. For more information, investors can also consult their respective brokers or financial advisers.
10. How can investors find more information on spacs?
Investors may visit the SGX Products website on spacs for detailed information (www.sgx.com/spacs) and FAQ on the spacs framework. Investors may also visit the SGX Academy for regular webinars and courses related to spacs.
Please note that investors should refer to the relevant spac’s prospectus and announcements for specific details on individual spac listings.
Candace Li is a research analyst with the Singapore Exchange
Cover photo: Bloomberg
