Harnessing the benefits of listing Special Purpose Acquisition Companies in Singapore | Legal Chat with Robson Lee Teck Leng, a global equity partner of international law firm, Gibson, Dunn & Crutcher LLP

In recent months, there has been a renewed interest in Special Purpose Acquisition Companies (SPACs) which provide an alternative route for private companies to get listed without a traditional initial public offering (IPO) process.

SPACs raised eyebrows last year when over 200 SPACs were listed in the US, raising around US$ 120 billion in the past 12 months according to Bloomberg. That exceeded the capital raised by SPACs in the preceding years combined, boasting high-profile investors, politicians and even sports personalities amongst its host of financial backers. The Economist reported that Gojek and Tokopedia, two of Asia’s top digital companies, is said to be considering a merger and subsequent public listing through a SPAC in the US. There is also a growing surge in popularity of SPACs listings in Europe (in particular, Amsterdam, which is leap frogging ahead of London as a favourite venue).

Virgin Galactic, DraftKings and Opendoor Technologies are just some examples of companies that went public by merging with SPACs. Co-working space leasing company, WeWork, is also said to be mulling a listing through a merger with a SPAC after its earlier IPO fell through.

In January 2021, the Singapore Exchange (SGX) expressed interest in allowing SPACs to list in Singapore, after receiving growing numbers of enquiries and expressions of interest for such structures. SGX could commence public consultations on the matter as early as the first quarter of this year.

So what are SPACs? What advantages do they offer over a traditional IPO? What are their inherent risks, and what principles and practices should SGX adopt to safeguard investors’ interests?

What are SPACs?

SPACs are essentially shell companies created for the sole purpose of raising capital through an IPO in order to acquire or merge with one or more operating companies pursuant to a process known as the initial business combination. At present, SPACs are largely listed in the US. They are usually formed and managed by seasoned financial sponsors or industry executives with a known track record, referred to as sponsors.

Prior to the initial business combination, SPACs have no discernible commercial operations. The sponsors invest initial capital to form the SPAC and hold all of its pre-IPO equity. A SPAC will then sell units at the IPO (usually priced at US$10 per unit) consisting of a share of common stock, plus a warrant or a fraction of a warrant that entitles the holder to buy more shares at a fixed price on a later date. Post IPO, such units are tradable on the open market and made available to other retail investors. The sponsor would typically retain about 20% of the post-IPO SPAC (also known as “founder shares” or “promote”).

After the SPAC becomes public, sponsors can begin to hunt for its target. The initial business combination requires a vote of approval from the SPAC shareholders before it can be completed. This transaction is often structured as a reverse merger in which the operating company merges with and into the SPAC (or a subsidiary of the SPAC), and the combined company is a publicly traded company that carries on the target’s business. When presented with the initial business combination proposal, investors can choose to either swap their shares for the shares of the combined company, or redeem their original investment amount with interest. The SPAC is required by its organisational documents to complete the initial business combination within a certain period of time (usually 2 years). Prior to that, the IPO proceeds remain in an interest-bearing trust account. If a SPAC is unable to “de-SPAC” within the deadline, the SPAC gets liquidated and investors are entitled to redeem their pro rata portion of the assets in the trust account.

Advantages of listing through SPACs

When investors invest in a SPAC at the IPO stage, they are essentially buying into the expertise and network of the sponsors rather than any specific company. In mature markets such as the US, SPACs are often backed by established sponsor teams that have demonstrated track records in terms of deal-making and value creation. Retail investors will enjoy the opportunity to invest alongside notable sponsors, particularly in businesses typically reserved for private equity sponsors. In the event that additional financing is required, sponsors may act as a ready source of funds as they can invest further capital through a Private Investment In Public Equity (PIPE) financing process.

From the sponsor side, the profit margin of a successful SPAC is even more compelling. The pre-IPO shares tend to be priced nominally (usually US$25,000 for the founder shares), giving sponsors a huge potential upside for a relatively modest sum of initial capital.

SPACs offer private businesses the opportunity to go public quickly, often within months. This bypasses the traditionally time consuming and tedious IPO listing process. In contrast, an IPO can take a year or more to complete. For private companies who have an immediate need to tap into the liquidity of public markets, SPACs offer a more ready lifeline.

Further, there is little certainty that a company will be priced appropriately in a traditional IPO process. In an IPO, the company’s share price is determined by market conditions on top of the company’s underlying business valuation. As such, a company is unsure of how much money it will receive until the day before its IPO. In a SPAC listing on the other hand, the price and deal terms are negotiated directly by the company’s management team. Given the present volatile market conditions brought out by the COVID-19 pandemic and global trade tensions, private businesses may prefer the SPAC listing route where they can benefit from having a greater control over the company’s valuation.

Risks of SPAC listings

SPACs are not without their inherent risks, however.

Unlike in a traditional IPO, SPACs are listed with no underlying business. This means that from the very onset, investors have no sight of the company that they will eventually be invested in. They are essentially handing the SPAC a “blank cheque”, and rely solely on the reputation of the sponsors.

Further, the interests of sponsors may not be fully aligned with that of SPAC IPO investors or indeed, subsequent investors on the open market. For example, sponsors generally purchase equity in the pre-IPO stage at more favourable terms. This means that they could have a shorter investment horizon, and a greater incentive to push through an initial business combination that may not necessarily be favourable to the other investors.

The quality of the target company may also be of concern as they are not subject to the same regulatory scrutiny as traditional IPO companies. As such, SPAC listing may not offer the same level of transparency needed for investors to make sound investment decisions.

A final issue is that the number of SPACs may outpace the number of quality companies that are willing to go public, leading to a possible oversupply of SPACs. Since sponsors are not allowed to express interest to any potential target until after the SPAC IPO, this means that they may take the SPAC public without knowing whether their pre-identified targets are even willing or ready to go public. The 2-year time limit also adds a further dimension to this concern of future demand. As a SPAC nears the end of its investment window, sponsors would have to compete with one another for a limited pool of targets. This may further drive down the quality of assets eventually acquired by the SPAC.

SPACs for Singapore

“Allowing SPAC listings in Singapore opens up exit opportunities for technology companies in the region and helps to retain these high-growth companies on the local bourse”, says Robson Lee, Partner of Gibson, Dunn & Crutcher LLP. “If the SGX is successful in implementing the use of SPACs, Singapore could potentially be a platform for Asian-based and regionally focused SPACs going forward.”

Robson Lee Teck Leng, Partner of Gibson, Dunn & Crutcher LLP

“At the same time, SGX could learn a thing or two from other jurisdictions to mitigate the risks of SPAC listings. Currently, the main way that SPACs protect shareholders is through investor approval rights before the initial business combination, along with a redemption right enabling investors to have their original investment amount returned with interest.”

On top of these, Robson highlights that SPACs could do more for the protection of shareholders. “SPACs have been criticised for providing greater returns to sponsors compared to shareholders. In some cases, sponsors still stand to profit significantly even if the target does not perform well. Apart from ensuring that only qualified sponsors are allowed to form a SPAC, SGX could potentially regulate sponsor incentives to ensure that it is more aligned with the interests of the other stakeholders.”

Further, one of the reasons why SPACs are viewed with a wary eye is examples of failure in the market. For example, electric truck start-up Nikola who went public via a SPAC in 2020 saw a massive spike in share price post IPO, but the company later became fraught with fraud allegations and the CEO eventually resigned. Robson emphasises that there is a need to establish a comprehensive regulatory framework for potential target companies. “SGX could consider prohibiting SPAC acquisitions of overly-risky asset classes, and regulating the use of forward-looking statements and financial projections.”

SPACs were previously considered by SGX back in 2010 but there was no follow-through. Given the growing interest in Asia, the recent tech boom and the string of SGX de-listings, the time is ripe for SGX to re-evaluate the viability of SPACs listings in Singapore. The Singapore market will need to be responsive to global changes to remain on the radar screens of institutional investors and funds. SPACS could potentially be a disruptive force to be reckoned with akin to the uberisation of the traditional IPOs.

Disclaimer: This article and the quotes cited should not be taken as any form of legal, tax or financial advice. Anyone intending to set up a SPAC should seek the appropriate professional advice.