The use of special purpose acquisition companies (SPACs) as an alternative route to access the equity capital markets in the United States of America (US) has fluctuated in popularity over the years as a result of changes in both market conditions and investor appetite. However, US SPAC activity has been buoyant during 2020 and SPACs are increasingly a topic of discussion elsewhere, including in Singapore. On 2 September 2021, the Singapore Exchange (SGX) announced its new rules that allow SPACs to list on the SGX’s Mainboard from 3 September 2021.
What is a SPAC?
A SPAC (SPACs are also commonly referred to as “blank cheque” companies or “cash shells”) is a company with no existing operations that is incorporated for the sole purpose of making one or more unspecified future acquisitions, typically targeting an identified industry sector or geographic region. The founders of the SPAC (commonly referred to as “sponsors”) will often have specific industry expertise or private equity experience.
Once incorporated, the SPAC undertakes an initial public offering (IPO) and listing of its shares on a public stock exchange. The funds it raises in the IPO are later used to acquire a private company (or companies), resulting in the acquired operating business effectively becoming publicly listed through a reverse merger.
SGX SPAC listing framework
In its announcement on 2 September 2021, the SGX highlighted the key features which a listing under the SPAC framework must follow, being:
- minimum market capitalisation of S$150 million;
- de-SPAC must take place within 24 months of IPO with an extension of up to 12 months subject to fulfilment of prescribed conditions;
- moratorium on sponsors’ shares from IPO to de-SPAC, a 6-month moratorium after de-SPAC and for applicable resulting issuers, a further 6-month moratorium thereafter on 50% of shareholdings;
- sponsors must subscribe to at least 2.5% to 3.5% of the IPO shares/units/warrants depending on the market capitalisation of the SPAC;
- de-SPAC can proceed if more than 50% of independent directors approve the transaction and more than 50% of shareholders vote in support of the transaction;
- warrants issued to shareholders will be detachable and maximum percentage dilution to shareholders arising from the conversion of warrants issued at IPO is capped at 50%;
- all independent shareholders are entitled to redemption rights; and
- sponsor’s promote limit of up to 20% of issued shares at IPO.
In addition to the key features highlighted by the SGX in their announcement, it is worth noting the following:
- at least 25% of the total number of the SPAC’s issued shares must be held by at least 300 public shareholders;
- the issue price of the shares/units/warrants offered must be at least S$5 each;
- the majority of the members of each of the audit, nominating, and remuneration committees of the SPAC must be independent;
- immediately upon listing, the SPAC must place at least 90% of the gross funds raised from its IPO in an escrow account operated by an independent escrow agent, being a licensed financial institution approved by the Monetary Authority of Singapore. The amount placed in escrow cannot be drawn down except in certain circumstances – primarily for the purpose of the business combination or on a liquidation of the SPAC. This is a similar approach to the NYSE and NASDAQ rules in the US;
- expanding on point ‘2’ above, the SPAC must complete a business combination within 24 months from the date of listing. However, where the SPAC has entered into a legally binding agreement for a business combination before the end of the 24 month period, it shall have up to 12 months from that date to complete the business combination (subject to an overall maximum of 36 months from the date of listing), subject to certain criteria including notifying the SGX of such extension and that such extension is permitted by the laws applicable to the SPAC in its jurisdiction of incorporation. The SGX has the discretion to reject such an application if it is of the opinion that there is no compelling justification for the time extension or if it is in the interest of the public to reject the application;
- the SPAC must appoint a financial adviser to advise on the business combination, and the financial adviser is expected to have regard to the due diligence guidelines issued by The Association of Banks in Singapore when conducting its due diligence;
- in certain circumstances, including where the business or assets to be acquired involve mineral, oil and gas, or property investment/development companies, the SPAC is required to appoint an independent valuer to value the business or assets. In addition, the SGX has the discretion to require a SPAC appoint an independent value on the acquisition of other types of business or assets;
- if the SPAC fails to complete a business combination within the permitted time frames set out above, it shall be liquidated. The amount held in escrow at that time shall be distributed to shareholders on a pro rata basis, subject to the earlier payment of taxes payable and direct expenses related to the liquidation distribution;
- the IPO proceeds not placed in the escrow account (and interest earned on the escrow amount) may be used for administrative expenses incurred in connection with the IPO, for general working capital expenses, and for the purpose of identifying and completing a business combination; and
- prior to a business combination, the SGX may permit the SPAC to raise additional funds through the issue of securities in certain circumstances and subject to certain requirements, including that at least 90% of the gross proceeds of the additional fund raising are placed in escrow.