Special Purpose Acquisition Companies (SPACs) are formed to raise capital through IPOs for the sole purpose of acquiring operating business(es) or asset(s) (i.e. business combination). Such acquisitions may be in the form of a merger, share exchange or other similar business combination methods. Prior to a business combination, SPACs are listed investment vehicles with no prior operating history and revenue-generating business/asset at IPO.
What is a SPAC sponsor?
A SPAC is generally established and initially financed by experienced and reputable founding shareholders (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. Sponsors may include but are not limited to private equity or venture capital firms and asset managers with expertise and track record in identifying acquisition targets for shareholders. The sponsors will sometimes announce their intention (at IPO) to focus their search within a specific geographical region and/or industry to find a suitable acquisition target. Sponsors are typically entitled to sponsor’s promote shares to increase their equity holdings in a SPAC. These shares are typically purchased at favourable terms (i.e. at minimal nominal sum) to incentivise sponsors for their risks taken in setting up a SPAC and acquiring a target company.
Where will shareholders’ funds be kept?
At least 90% of the gross proceeds raised at a SPAC listing must be placed in an escrow account. Under such escrow arrangement, funds are held by a third party (i.e. an independent escrow agent or financial institution licensed and approved by MAS). It is required to place, immediately upon the listing, at least 90% of a SPAC’s gross proceeds raised in an escrow account which can only be drawn down in the event of a business combination, SPAC liquidation or other specific circumstances. Sponsors can only invest escrow account funds in approved investments (e.g. cash or cash equivalent short-dated securities). The utilisation of the funds in the escrow account will be primarily used for business combination.
Investing in a SPAC listing can largely be seen as investing in the founding shareholders’ profile and abilities to identify companies and execute business combination transaction. In Singapore, SPAC sponsors must complete a business combination (i.e. de-SPAC) within 24 months from IPO, with an extension of up to 12 months subject to fulfilment of prescribed conditions.
What is the difference between SPACs and traditional IPOs?
Unlike traditional IPOs, SPAC listings 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/business upon announcing a proposed business combination agreement (i.e. a proposal to acquire or combine with an operating company).
The key features of SGX’s SPAC framework include:
- A minimum market capitalisation of S$150 million.
- Minimum IPO issue price of S$5 per unit.
- At least 25% of total issued SPAC shares (excl. treasury shares) must be held by at least 300 public shareholders.
- SPAC sponsors must subscribe to at least 2.5-3.5% of the IPO units depending on the market capitalisation of the SPAC.
- At least 90% of gross IPO proceeds raised must be placed in an escrow account (operated by an approved independent agent).
- Business combination must take place within 24 months of IPO, with an extension of up to 12 months, subject to fulfilment of prescribed conditions.
- Maximum percentage dilution to shareholders from conversion of warrants issued at IPO capped at 50%
- Shareholders have voting, redemption and liquidation rights in relation to a proposed business combination.
- Independent valuer for business combination to be appointed in the event of an absence of (i) PIPE financing; or (ii) where SPAC acquires a mineral oil and gas (MOG) or a property investment/development target.
- Initial business combination to have a fair market value of ≥80% of the SPAC’s escrowed funds
- SPAC sponsor’s promote (sponsor’s entitlement to additional equity at nominal or no consideration) is kept at up to 20% of issued shares at IPO.
- Sponsors are not allowed to divest their shares from IPO to de-SPAC. There will also be a 6-month moratorium after completion of the de-SPAC process, with a further 6-month moratorium thereafter on 50% of original shareholdings if certain criteria are met.
More information can be found in SGX’s consultation paper and response to consult.
A listed SPAC (pre-de-SPAC) is a recently incorporated company with no operating history and revenue, and no basis for investors to evaluate the SPAC’s ability to achieve its business objective.
Investors will need to rely on the sponsor’s quality and execution track record to identify and acquire companies to enhance shareholder value. A sponsor may not be able to acquire a target within the approved timeframe to complete a business combination. Up to 10% of the IPO proceeds may also be expensed as the sponsor performs the search and attempts to execute a business combination.
Additional funding from the sponsors may potentially dilute an investor’s existing stake in the combined company. The three sources of potential dilution are: sponsor’s promote (up to 20% dilution), warrants (capped at 50%), and PIPE investors (unlimited and dependent on investment terms).
Should a SPAC be unable to complete a business combination (i.e. de-SPAC) within the allowed timeframe, the SPAC may be liquidated. While its assets will be returned to investors, the proceeds received by investors may be less than what they invested in at the time of IPO.
SPACs may also, like other securities, be subject to:
Prices may also be impacted and fall below your purchase price due to macroeconomic or sector/SPAC-specific factors.
Refers to the fluctuation in the value of a stock due to the changes in its stock price.
Stock liquidity is the degree to which stocks can be bought or sold in the market without materially impacting their market price. Liquidity risk refers to the risk where a stock cannot be transacted in a timely manner.
More risks specific to a SPAC can be found in the IPO prospectus and/or shareholder circular of the respective SPAC listing.
In light of market developments, increased interest, and potential M&A opportunities in the Asia Pacific, SGX has launched the Special Purpose Acquisition Companies (SPACs) 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.
Please click here for more information on Special Purpose Acquisition Companies (SPACs).