The Singapore Exchange has launched a consultation on proposed rules governing special purpose acquisition companies.
Special purpose acquisition companies (SPACs) are shell or “blank cheque” entities formed by a group of investors—known as sponsors—who raise funds from other investors through an initial public offering (IPO). After raising funds, the sponsors are given a set timeframe to acquire a target business and take it public, also known as a “business combination” or “de-SPAC.” If no suitable deal is secured, the SPAC is liquidated, and the funds in the escrow account are returned to investors.
Sponsors gain access to ready capital to chase deals and are rewarded generously with a "promote": usually a 20% stake in the SPAC for a nominal sum. Meanwhile, investors who buy units of the SPAC at the IPO would, in each unit, get a redeemable share and warrants, which confer the right to purchase from the SPAC a certain number of shares in the future at a certain price.
The main advantages of a SPAC transaction are its speed to market and its ability to offer price certainty in valuing target companies.
The Singapore Exchange (SGX) has observed the popularity of SPACs listings in other markets and a renewed interest for SPACs to be introduced to the Singapore capital market. SGX has launched a public consultation exercise, open until 28 April 2021, to assess the appetite for SPACs and consider allowing them to list. Depending on the feedback from the consultation, SGX has announced that it would aim to introduce a framework by mid-2021.
The potential for the SGX to allow SPAC listings is welcome news for companies and investors alike. Asian SPACs would add depth and diversity to the market in Singapore as SPACs could attract technology listings that would enliven a market dominated by old economy stocks such as banks and real estate. Indeed, many prominent tech companies in Southeast Asia have matured to a point where they are considering exits via public listings.
Moreover, allowing SPACs to list in Singapore would increase investor choice. Having SPACs as listing vehicles would allow investors to get exposure to high-growth companies at an early stage, which they usually would not be able to get via traditional IPOs, wherein the average investor is left to buy shares of newly listed companies on the secondary market, where prices are often higher.
Notwithstanding the benefits of SPACs described above, the SGX is keenly aware of the concerns and risks associated with the listing of SPACs. Accordingly, through the SGX consultation, Singapore Exchange Regulation (SGX RegCo) is seeking feedback on a framework that would attempt to reduce some of the risks of excessive dilution for long-term investors, as well as the rush for sponsors to de-SPAC.
SGX Proposals
In its consultation paper on the proposed listing framework for SPACs, SGX proposes for Singapore SPACs to have a minimum market capitalisation of S$300 million, in line with mainboard rules, with a timeframe of three years to de-SPAC. At least 90% of IPO proceeds will be placed in escrow pending acquisition of a target. The higher minimum market capitalisation threshold serves to facilitate the consummation of a sizeable business combination and ensure a SPAC is backed by experienced sponsors and/or management with a proven track record and reputation.
To align the interests of founding shareholders and the management team with those of independent shareholders, the SGX proposes to restrict them and their respective associates from voting on business combinations. This restriction would allow the business combination transaction to be completed on terms not prejudicial to the interests of the SPAC and of independent shareholders. Rather, approval of the business combination must be obtained from the SPAC’s independent directors and independent shareholders.
For independent shareholders who voted against the business combination, they can choose to redeem their ordinary shares and receive a pro rata amount of cash held in the escrow account. Additionally, the SGX proposes imposing a moratorium on the shareholding interests of key parties at specified junctures and to subject the founding shareholders and management team to a minimum equity participation, determined based on the market capitalisation size of the SPAC at the IPO.
To safeguard against dilution risks, the SGX proposes to limit capital redemption rights at de-SPAC to independent shareholders who vote against the business combination. The redeemed shares will be cancelled, and any accompanying warrants nullified and void. This restriction may mitigate concerns on high redemption rates at the vote for the business combination, which, due to additional funding required to complete the business combination, causes further dilution to remaining shareholders. To mitigate dilution risks arising after the business combination, the SGX proposes for warrants (if any) to be attached to underlying shares so that they are nullified when a share is redeemed. That said, given that such a proposal may present commercial drawbacks, the SGX proposes the alternative of imposing a cap on the dilutive impact arising from the conversion of warrants post–business combination.
To ensure equitable regulatory treatment in permitting companies to list via business combinations with SPACs instead of via traditional IPOs, and to promote fair and orderly trading upon successful completion of business combinations, the SGX proposes for resulting issuers to meet some existing listing requirements. For instance, according to SGX RegCo Chief Executive Tan Boon Gin, de-SPACs will require "prospectus-level disclosures" on the target businesses, and shareholders' circulars containing information such as financial position and company management must be submitted to SGX for review. Resulting issuers that do not meet listing requirements under mainboard rules will be delisted.
Given the strong demand across Asia for the Asian-sponsored SPACs that have listed in other exchanges so far, as well as the growing familiarity that the local and regional investor base have with some recent SPACs, there is now an increasingly positive scope for the SPAC theme in Singapore as well.
If the SGX decides to allow SPAC listings, Singapore could well become Asia's hub for SPACs. This would open up new funding avenues for companies around the region, create a new asset class for investors in which risks and rewards are fairly balanced, and ultimately allow capital markets in Singapore to remain globally competitive.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Bernard Lui, a director of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP.