In recent years, we have witnessed the growth of special purpose acquisition companies (SPACs), also known as shell or “blank-cheque” companies. SPACs raise funds through an initial public offering (IPO) to acquire existing companies.
The acquisition of a target company must be completed within two years of the IPO, known as the “de-SPAC” process. If a fair deal is not secured, the SPAC will be liquidated, and funds will be returned to shareholders.
This alternative has increased in popularity over the past years as it is a much faster and simpler way for companies to raise capital than a traditional IPO.
The pros for investors would be the broadening of investment products available as they can now delve into private companies that would have only been available in the private equity sector.
SGX SPACs Listing Framework
Last month, the Singapore Exchange (SGX) introduced new rules enabling SPACs to list on its Mainboard, with effect from 3 September 2021.
The rules that SPACs must comply with include:
- 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
- Sponsor’s promote limit of up to 20% of issued shares at IPO
How does the easing of rules affect firms and investors?
Compared to the March 2021 consultation paper, the September listing framework focuses on matching sponsors’ and shareholders’ interests instead of the previously suggested elements that limited shareholders’ rights. Furthermore, specific regulations, including minimum market capitalisation and redemption rights, have been relaxed under the new listing framework.
The halving of minimum market capitalisation from S$300 million to S$150 million is a significant shift from the March 2021 consultation paper. This move will also serve as an incentive, allowing a more comprehensive range of firms to list on the SGX Mainboard via a merger with a SPAC vehicle.
The minimum equity rule has also been altered from a fixed-quantity approach to a percentage-based one, allowing sponsors more flexibility in terms of the form and timing of their capital contribution.
Compared to the stricter proposed rules in the consultation paper, the September framework stipulates that all independent shareholders, regardless of their voting power, will be allowed to redeem their initial investments and retain their warrants. This enables shareholders to monitor market response to the acquisitions, protecting shareholders by enabling them to exercise their right to redemption if the share price drops below the IPO price.
However, many are worried that the relaxed rules may lead to more significant risks for investors. In reply, SGX reinforced that many emphases will be placed on the quality and track record of sponsors.
How SPACs affects the economic situation in Singapore
Economic uncertainty caused by the pandemic has resulted in many start-ups looking to the SPACs route to raise funds by going public.
Singapore, being the first prominent Asian stock exchange that offers SPACs listing coupled with the high demand for Asian-sponsored SPACs across Asia, the SPACs framework will likely assist in drawing in regional funds and fast-growing firms. This would also probably build up the long-time sombre market for equity listings.
Investors predict that this move will draw in high-potential Asian tech companies, diversifying Singapore’s stock market, heavily dominated by property and finance companies.
However, with the relatively small Singapore market size, liquidity will be a significant cause of concern for potential investors. Singapore will be up for tough competition against foreign markets where valuations and liquidity are higher. Still, Singapore’s SPACs listing provides an Asian market alternative that will attract firms in the region, especially those too small for the U.S. market.
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