This article was written in collaboration with SGX. All views expressed in this article are the independent opinion of DollarsAndSense.sg based on our research. DollarsAndSense.sg is not liable for any financial losses that may arise from any transactions and readers are encouraged to do their own due diligence. You can view our full editorial policy here.
By now, investors should be aware that several SPACs have been listed on the Singapore Exchange (SGX). This makes the SGX one of the first major Asian exchanges to offer SPAC listings.
Short for Special Purpose Acquisition Companies, SPACs are also commonly referred to as blank cheque companies. This is because they are shell companies with sponsors who raise funds via IPOs for the sole purpose of acquiring an operating business.
On its own, SPACs can list relatively quickly because they do not have any existing business or assets that needs to be scrutinised nor any financials to disclose to investors or regulators. Through a business combination (or merger) with a SPAC, private companies that want to list can also do so more quickly and efficiently, and possibly at a lower cost.
Another benefit for private companies choosing to list via a SPAC is that they have a ready-made pool of investors, without having to do extensive marketing. They also gain access to an experienced fundraising team.
Even as private companies choose to list via the SPAC route, additional fundraising is a common characteristic of the business combination exercise, with the SPAC sponsors sourcing for private investments in public equities, better known as PIPE investors.
Read Also: 5 Things To Note About The New SGX SPAC Listing Structure
3 SPACs Have Already Listed On The SGX In 2022
To attract higher quality sponsors and acquisitions, SGX-listed SPACs must have a minimum market capitalisation of $150 million. This is in line with the existing market capitalisation requirement under the SGX Mainboard listing rules.
Another characteristic of SPAC listings is its minimum $5 IPO price. This amount may be higher than what some retail investors in Singapore are used to. For example, the most recent SGX Mainboard listings, Digital Core REIT, was priced at US$0.88 per unit, and Aztech Global, was priced at $1.28 per share. In its SPAC listing framework, SGX highlights that this is “sufficiently high to signal to retail investors to carefully consider the associated risks of investing in a SPAC”.
Since the start of the year, SGX has already welcomed several SPACs listings. In total, three SPACs have been listed in January 2022 alone – presumably with more in the pipeline. They are: 1) Vertex Technology Acquisition Corp or VTAC (SGX: VTA); 2) Pegasus Asia (SGX: PGU); and 3) Novo Tellus Alpha Acquisition (SGX: NTU).
Before we invest in SPAC IPOs or listings, here are 8 things we should understand about them.
Read Also: Vertex SPAC; Pegasus Asia; Novo Tellus Alpha Acquisition: SPACs Listing On SGX
#1 What Is The Sponsor Track Record?
As with all businesses, the management team makes a big difference. Arguably, the sponsors of a SPAC might be an even more important indicator for SPAC investors. This is because SPACs do not have any underlying business, and we are entrusting the sponsors to identify and acquire/merge with a private company at an attractive valuation.
The three existing SPAC listings on SGX all have reputable sponsors. VTAC is sponsored by Temasek-backed Vertex Venture. Pegasus Asia is sponsored by European asset manager Tikehau Capital and Financière Agache a holding company controlled by Arnault Family Group, the controlling shareholder of luxury products groups Christian Dior and LVMH. The third SPAC listing, Novo Tellus Alpha Acquisition, is sponsored by Novo Tellus PE Fund 2, and their investment team has a track record of investments in SGX-listed companies such as AEM and ISDN Holdings. In their prospectus, all three SPACs (not surprisingly) list the technology sector as a focus area for their target acquisitions.
Each of these SPACs also attracted significant investor interest during its IPO. The public tranche of VTAC, Pegasus Asia and Novo Tellus Alpha were oversubscribed to the tune of 36 times, 7.8 times and 7.6 times respectively. Post-listing, they are trading at close to their IPO price between $4.87 to $5.13 as at 14 February 2022.
#2 Sponsors Interest Are Aligned With Investors
To ensure that SPAC sponsors have skin in the game, they are required to subscribe to a minimum of 2.5% to 3.5% of the IPO units/shares/warrants, depending on the market capitalisation of their SPAC.
The smaller the market capitalisation, the higher the minimum subscription requirement.
| Market Capitalisation of SPAC | Proportion of Subscription |
| $150 million to less than $300 million | 3.5% |
| $300 million to less than $500 million | 3.0% |
| $500 million and above | 2.5% |
In addition, sponsors cannot sell their shares from IPO up to the de-SPAC process, and up to 12 months after the de-SPAC process.
Sponsors also have an incentive for the SPAC to do well as one of their main compensation methods is through the promote shares or Sponsor Promote, a payment in shares which they receive for free or a nominal payment.
#3 What Are You Investing In?
When we invest in a SPAC during its IPO, we are investing in SPAC units. There may be a minimum initial subscription number. The three existing SPACs all required a minimum initial subscription of 1,000 SPAC units at the time of offering.
These SPAC units will trade in board lots of 100, and some time after the listing, be detached into SPAC shares and SPAC warrants. The shares will continue to be traded in board lots of 100 while the warrants will be traded in board lots of 1. This detachment can be automatic or optional – and investors need to refer to the prospectus for information on this. All three SPACs currently listed on SGX have an automatic detachment feature. However, this does not need to be the case for future SPAC listings.
In cases when the detachment is automatic, it will typically happen on the 45th calendar day from its listing date. This means our SPAC units will no longer be traded. They will be removed from our securities account 2 market days after the detachment day. Instead, we will have a corresponding number of SPAC shares and SPAC warrants that are traded separately credited into our account.
In cases when the detachment is optional, SPAC units can still be split into SPAC shares and SPAC warrants. For investors who do not wish to detach their SPAC units, they can continue to trade the SPAC units as well.
Each SPAC share gives us a voting right in the SPAC. Similarly, each whole SPAC warrant entitles us to subscribe for one SPAC share at a later date with a fixed exercise price – which will be listed within the IPO prospectus.
For example, for the Pegasus Asia SPAC, its SPAC warrants has an exercise price of $5.75 and will be exercisable 30 days after the completion of the business combination. Usually, these warrants will be exercisable for a period of five years after the business combination.
#4 Warrants Are Fractional (And Partial Warrants Will Be Disregarded)
For every SPAC unit we own, we will get one SPAC share and a fractional warrant after the detachment.
As only a whole SPAC warrant entitles us to subscribe for one SPAC share at a future date, we need to take this into consideration when buying and selling our SPAC units.
In the example of VTAC SPAC, we will receive 1 SPAC share and 0.3 of one SPAC warrant for each SPAC unit we own. If we are left in a situation where we do not own a whole number of SPAC warrants post-detachment, our partial SPAC warrants will be disregarded.
Also, in the VTAC SPAC example, we will receive an additional right to 0.2 of one SPAC warrant per share, at a later date for shareholders who have not tendered for share redemption at or around the completion of the initial business combination.
#5 De-SPAC Must Take Place Within 24 Months Of IPO (With A Possible Extension Of Up To 12 Months)
Once a SPAC has been listed, it has 24 months to enter into a binding agreement to acquire or merge with a business as part of its process to de-SPAC. This can be extended by an additional 12 months to complete the de-SPAC process depending on the fulfilment of prescribed conditions.
According to SGX’s SPAC listing framework, this maximum timeframe of 36 months provides sufficient time for the sponsor to search for a good-quality business to acquire and to reach favourable terms with, rather than force SPACs to settle for lower-quality businesses or be strong-armed into a poorer deal.
With a maximum timeframe of up to 36 months, SPACs will also have sufficient time to source for an alternative business and complete the de-SPAC process should their initial acquisition target fall through.
Notwithstanding this, if a binding agreement is not made within 24 months, the SPAC will be liquidated.
#6 An EGM Will Be Called For Shareholders To Vote On Proposed Business Combination
Once a business combination target has been identified to go ahead, an Extraordinary General Meeting (EGM) will be called. Shareholders will receive details of the business combination within a Shareholder Circular not less than 21 days before the EGM.
This will give shareholders sufficient time to assess the target acquisition company. In addition, shareholders can also decide whether they would prefer to redeem their shares within this timeframe.
Typically, the Board will set a period for shareholders to elect to redeem their shares and the relevant dates will be included in the circular to shareholders. The period to redeem the shares will be from the date that the business combination EGM notice is issued to slightly before the EGM date (generally 2 days before the EGM). The details will be set out in the prospectus. For example, in the Pegasus Asia prospectus, it is stated that “It is expected that the period to elect to redeem shall be the period from the date of the notice of the Business Combination EGM and ending on the second Market Day preceding the Business Combination EGM”.
As mentioned earlier, certain incentives, such as the additional fractional warrants issued by VTAC, may also be given to shareholders who do not tender for share redemption.
For the de-SPAC to go through, more than 50% of shareholders AND more than 50% of the Independent Directors must vote in favour of the business combination.
If the business combination does not receive sufficient supporting votes, the share redemption will not proceed and the search for an alternative business combination will continue.
Read Also: What Is Special Purpose Acquisition Company (SPAC) And How Is It Different From Conventional IPOs?
#7 SPAC Shareholders May Be Potentially Diluted
SPAC investors should be ready to see their initial shareholdings diluted. There are three main ways this can happen.
First, when a business combination target is identified, additional fundraising by external investors (i.e. PIPE investors) may be required. There isn’t a cap to the dilutive nature of this fundraising as it depends on the size of the potential target. Nevertheless, investors may be left with a smaller shareholding in the new entity post-merger.
Secondly, investors may also see their shareholdings diluted from the exercise of warrants. As mentioned, SPAC units will detach into SPAC shares and SPAC warrants. The SPAC warrants will likely be exercised if shares are trading higher than the exercise price. Thus, investors should look out for the exercise price of the warrants within the prospectus. All three of the existing SPAC IPOs currently on SGX have set the exercise price for their warrants at $5.75. If their shares are trading at higher than $5.75, investors can exercise their warrants for a profit. The maximum dilution from the conversion of warrants issued at IPO is capped at 50% . Investors will also need a whole warrant to exercise it.
Finally, investors will also be diluted by the Sponsors Promote. This is an entitlement for sponsors to get additional equity at nominal or no cost. This is primarily meant as an incentive payment for their efforts in setting up the SPAC vehicle and successfully acquiring a business. As this can have a dilutive effect on other shareholders, SGX’s SPAC listing framework keeps it to a maximum of 20%. As mentioned earlier, this also aligns the interest of shareholders with sponsors.
#8 Investors May Not Receive The Full Amount Of Their Investment From The Escrow Account In The Event Of Redemption Or Liquidation
As the SPAC does not have a business at the point of its IPO, the gross proceeds raised are mainly meant to acquire or merge with another company. To safeguard these funds, at least 90% of IPO gross proceeds must be kept in an escrow account – i.e. a third-party independent escrow agent or financial institution licensed and approved by MAS.
For example, all three SPACs on SGX are setting aside 100% of their gross IPO proceeds into escrow accounts, even though SGX’s SPAC listing framework only requires at least 90% to be set aside.
The only reason for a drawdown on these funds should be for the purpose of de-SPACing (i.e. to acquire a target company in the future) or a SPAC liquidation if no acquisition or merger takes place within a stipulated timeframe.
However, there may also be other instances when the escrow account diminishes in value. For example, VTAC’s prospectus states that “if third parties bring claims against us, the proceeds held in the Escrow Account could be reduced”.
According to the prospectus for all the listed SPACs, amounts in the escrow account may also be invested in short-dated securities. Thus, any reduction in the value of such securities may also reduce the value of the escrow account.
For more in-depth detail on the escrow account and relevant risks associated with it, investors should refer to the “Risk Factors” section in a SPAC prospectus.
What Investors Can Expect When Investing In A SPAC
As SPAC listings are new on SGX, investors need to know what to expect before investing in it. Thankfully, SGX has depicted a clear timeline of what we can expect and when we can expect it.
Source: SGX (as of 14 February 2022)
For more details on the SGX SPAC listing framework, investors can refer to SGX’s securities products page for a comprehensive explanation of the entire process and FAQs.
Top photo by Moo Kar Ming, DollarsAndSense
