Special Purpose Acquisition Companies (SPAC) or “blank cheque companies” have been on a rise in 2020. In the United States, a record of US$83.3 million were raised in 2020, 6 times more than the year before. As of March this year, the total SPAC funding raised has eclipsed 2020’s record, hitting US$87.1 million within 3 months.
With the SPAC trend generating so much buzz globally, our local Singapore Exchange (SGX) has launched a market consultation with the potential to start SPAC listing as soon as this year. Additionally, SPAC has been gaining momentum among Singapore companies with the likes of Grab, One Championship and Property Guru looking to potentially merge or start their own SPAC in the United States.
What Exactly Is SPAC And Why Are They Known As “Blank Cheque Companies”?
Created in the 80’s, SPAC is an alternative listing structure for a company to raise capital from the public to acquire one or more companies. The acquired entity have to be a private (unlisted) company.
SPACs are typically given 24 to 36 months to identify companies and “De-SPAC” – whereby identified companies are acquired and merged into the publicly trading SPAC holding company. This structure is also the reason why SPACs are called “blank cheque companies”.
Upon listing, each shareholder is given a share and a proportion of a warrant. The warrant is the right to buy stocks directly from the SPAC at a given price within a timeframe.
While the SPAC is sourcing the right acquisition target, the money raised from the SPAC listing will be placed in a trust. The capital in trust can only be used for costs relevant to acquiring and “De-SPAC-ing”. In the event, a SPAC does not manage to find the target acquisition, they can either request for an extension or return the funds back to the shareholders.
As with all listings, the SPAC would have to clear regulatory requirements before going on the stock exchange. These pre-listing regulatory requirements usually involve ensuring a healthy track record on the management team or sponsors, and a reasonable criterion for potential acquisitions. There is no substantial financial due diligence conducted on the SPAC before listing since it is a company without any revenue.
How Is SPAC Different From Conventional IPO?
#1 Conventional IPO Requires A Revenue Generating Company While SPAC Is A Temporary Fund
For conventional IPO, it requires a healthy company with historical financial track records to generate reasonable interest from public investors. This allows investors to see and determine for themselves if they would want to invest in the company. As an investor, you have a clear sight as to the company you are buying into when you invest in an IPO.
On the other hand, SPAC is a temporary fund formed with the purpose of acquiring private entit(ies). Once the funds are raised, the management team sources and determines the private companies that are suitable for acquisition. As an investor, you do not necessarily know the companies you are buying into when you invest into a SPAC, instead, you are relying on the capabilities of the management team to source for the right acquisition(s)
#2 Conventional IPO Gives Company Share, While SPAC Gives Company Share & Warrant
During an IPO, investors get to subscribe for the initial listing and receive shares of the company upon purchase.
For SPAC, when investors subscribe for the initial listing, they not only receive shares but also a full or partial warrant for each share acquired. For example, for every share acquired, an investor could receive a quarter warrant. For a warrant to be executed, it needs to be a whole warrant.
Having a warrant allows the investor to purchase more shares directly from the SPAC at a fixed price and investors usually execute or sell warrants during the pre-merger phase. Pairing warrants with shares is a structure that tries to compensate the risk the SPAC shareholder took to invest before a target company is made known.
#3 Conventional IPO Valuation Is Determined By Market But SPAC Has A Set Price
The act of listing a company on a stock exchange is to raise funds from the public. By going public, companies are placed under the market’s scrutiny and their share value would be determined by their financial performance and capabilities.
Being a blank cheque company, SPAC does not generate any revenue. Hence, potential investors would not be able to properly assess the price of a SPAC share. Therefore, the initial listing price of SPACs tends to have a fixed floor. In the United States, SPACs list at an average price of US$10 or higher.
#4 SPAC Reduces Time & Cost Needed To List Compared To A Conventional IPO
Based on a PriceWaterhouseCoopers (PWC) report, upon finding a target company, a SPAC can take 3 to 6 months to list the acquired company. The listing process can save on underwriting and legal cost as SPAC management teams are usually financial professionals themselves with experiences in taking companies public. This process is almost 4 times shorter than a conventional IPO, which can take 12 to 18 months.
#5 SPAC will De-SPAC
As a shareholder of a public company, major corporate activities that can result in large valuation changes are not that common. However, due to the nature of SPAC, shareholders can expect to be involved in at least one major corporate event – “De-SPAC-ing”
“De-SPAC” is the process whereby the SPAC acquires or merges with one or more companies. This process is similar to a public company acquiring or merging with another company. Depending on the SPAC, shareholders may get to vote on the transaction. If not, shareholders can choose to redeem their shares’ portion of the trust fund or hold on and continue as a shareholder in the newly merged entity.
Currently, apart from the United States, SPACs can be found on other international exchanges such as Euronext Amsterdam, Euronext Paris and Frankfurt stock exchange. As SPAC gains global momentum, Singaporean investors should be aware of this new listing structure and its potential launch in Singapore. While the exact details of how SPAC in Singapore has yet to be ironed out, the generic overall structure of SPAC is as mentioned above. Investors can expect to see a SPAC listing as soon as the end of 2021 if the current public consultations by SGX proceed smoothly.
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