Special Purpose Acquisition Companies (SPACs) have recently gained much investor interest, especially after Grab’s $39.6 billion listing on the Nasdaq via a SPAC merger. The SGX has since launched the SPAC Framework to introduce this new listing vehicle to the Singapore market. In January 2022, the first two SPACs in Singapore have listed in quick succession: Vertex Technology Acquisition Corporation Ltd (VTAC) (SGX: VTA) listed on 20 January 2022 and Pegasus Asia (SGX: PGU) listed on 21 January 2022.
For investors in Singapore, these SPAC listings allow investors to participate in private equity arrangements (e.g. companies at a fast growth stage) in the form of a publicly listed company. In essence, SPAC allows investors to pool funds to acquire a private company, usually start-ups with high growth potential. If you choose to invest in a SPAC before they acquire their target acquisition company, you are investing into the SPAC management’s ability to identify and execute the business combination transaction such as a merger. Further details on how a SPAC works are explained below.
Similar to other forms of investing, SPAC investing has its risks. Unlike a listed company, a listed SPAC has no operating history and revenue and there is no basis for investors to evaluate the SPAC’s ability to achieve its business objective. Investors will have to rely on the sponsor’s ability to identify and acquire companies to enhance shareholder value. Additionally, throughout the various stages of a SPAC’s lifecycle, additional funding from sponsors, private investments in public equities (PIPE) investors and other investors can potentially dilute an investor’s existing stake in the eventual combined company. They also face liquation risk. In Singapore, SPAC sponsors must de-SPAC (i.e. complete a business combination) within 24 months from IPO, with an extension of up to 12 months subject to fulfillment of prescribed conditions. If a SPAC is unable to do so, it may be liquated.
If you are interested in SPACs or want to find out more about this new listing vehicle, here are 5 things to know about SPACs.
#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 business(es) or asset(s) (i.e. initial business combination). 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/asset at IPO.
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.
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/businesses upon announcing a proposed BC agreement (i.e. 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.
#2 What Is The Structure Of The Resulting Company Post 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 (i.e. pro-rated share of the funds held in the escrow account). Shareholders will be able to vote on the proposed acquisition/merger at an extraordinary general meeting (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 (i.e. private investments in public equities – PIPE). PIPE implies a private placement of securities of a publicly listed company made to institutional investors (e.g. asset managers) and/or accredited investors.
If the BC is approved, the SPAC and the acquisition target will be merged into a publicly traded operating company/listed company. The shareholders of the resulting entity will consist of SPAC sponsors, public investors, target company’s shareholders and PIPE investors.
#3 What Is The De-SPAC Process And What Happens At De-SPAC?
The SPAC sponsor must complete a BC (i.e. 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 (e.g. PIPE, target company’s existing shareholders).
#4 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/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.
#5 What Are Some Investors 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 (i.e. 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 advisors.
Investors may visit the SGX Products website on SPACs for detailed information (http://www.sgx.com/SPACs) and frequently asked questions (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/announcements for specific details on individual SPAC listing.
Editor’s Note: Some answers for this article were extracted from the SGX 10 in 10 series published on 11 January 2022 and have been republished with permission. You can read more about SPACs on the SGX website.
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