Special purpose acquisition companies (SPACs)

Singapore Exchange (SGX) announced the new SPAC listing rules on its Mainboard, effective 3 September 2021. It follows the public consultation paper released in March 2021 that received feedback from over 80 respondents, which according to SGX is possibly the highest response rate to any of its consultations in recent years.

The new listing framework enhances the reputation of SGX as one of the most progressive bourse in the Asia Pacific region and is expected to add the much needed vibrancy to Singapore’s capital markets. Being an early adopter of this alternative capital raising route within the Asian time zone provides SGX with the necessary ingredients to act as a platform for fast growing Asian companies.

Listing criteria for SPAC on SGX

Market capitalisation	Minimum of S$150 million
Timeframe for de-SPAC	Within 24 months of SPAC IPO, with extension of 12 months subject to prescribed conditions
Moratorium	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 shareholding
Minimum equity participation by sponsors	Sponsors must subscribe to at least 2.5% to 3.5% of the SPAC’s IPO shares depending on the SPAC’s market capitalisation, with aggregate shareholding not exceeding 20% of the SPAC’s issued share capital at IPO
Approval of de-SPAC	De-SPAC can proceed if more than 50% of the SPAC independent directors approve the transaction and more than 50% of the shareholders vote in support of the transaction
Warrants	Warrants issued to shareholders will be detachable. Maximum percentage dilution to shareholders arising from the conversion of warrants issued at IPO is capped at 50%
Redemption rights	All independent shareholders are entitled to redemption rights

_{Source: SGX News Releases, SGX introduces SPAC listing framework, 2 Sep 2021}

Suitability assessment factors for SPAC

Key highlights of certain guidance relating to suitability assessment factors of SPACs under SGX Mainboard Listing Rules Practice Note 6.4 include:

Profile including track record and repute of the founding shareholders and experience and expertise of the management team of the issuer.
Business objective and strategy of the issuer.
Nature and extent of the management team’s compensation.
Extent and manner of the founding shareholders and the management team’s securities participation in the issue, including equity interests acquired by the founding shareholders, management team and their associates at nominal or no consideration prior to or at the IPO.
Intended use of IPO proceeds not placed in the escrow account and the escrow arrangements governing the funds in the escrow account.
Provisions in the Articles of Association and other constituent documents of the issuer (including comparability of shareholder protection and the liquidation rights with that of Singapore-incorporated companies, and whether the issuer will be subject to the Insolvency, Restructuring and Dissolution Act of Singapore (IRDA) for liquidation procedures or the incorporation of such equivalent provisions of the IRDA).

Requirements for de-SPAC

Key criteria to be met prior to completion of de-SPAC:

Fair market value of target	At least 80% of the amount in the SPAC’s escrow account at the time of entry into the binding agreement for the business combination.
Identifiable core business	Business combination must result in the resulting issuer having an identifiable core business of which it has a majority ownership and/or management control. SGX may consider a business combination involving an acquisition of a minority stake in a business(es) or asset(s), where the resulting issuer can demonstrate that it has management control of such business(es) or asset(s).
Financial adviser (FA)	Issuer must appoint a FA, who is an issue manager, to advise on the business combination.
Independent valuer	Issuer must appoint a competent and independent valuer to value the business(es) or asset(s) to be acquired under the business combination where (A) a placement or subscription for the issuer’s equity securities by institutional and/or accredited investors, is not conducted in contemporaneous with the business combination; or (B) the business(es) or asset(s) to be acquired under the business combination involves a mineral, oil and gas company, or property investment/development company. A summary valuation report must be included in the shareholders’ circular in relation to the business combination.
Shareholder circular	Shareholders’ circular seeking approval for the business combination must comply with the prospectus disclosure requirements.

What is a SPAC and how it works

SPACs are:

“Blank cheque” companies formed for the purpose of acquiring companies.
Formed by individuals with experience and reputations to allow them to identify and acquire one or more target businesses that will ultimately be successful public company/s.
Ideally comprise firms and/or individuals with demonstrated success in identifying, acquiring and operating growth businesses and with experience in the public company setting.

SPACs vs traditional IPOs

Roadmap: SPAC to a SPAC merger

Why are SPACs a viable and more relevant alternative to IPOs for startups in Singapore today?

Startups may consider an acquisition or merger with a SPAC instead of taking the traditional IPO route directly for a number of reasons. They can retain an agreed equity stake in the business, raise funds and have the flexibility to negotiate favourable deal terms such as valuation and additional investment with the SPAC sponsor (currently not available for the traditional IPO route). It also enables startups to expedite the time required to go public as well as reduce fund raising costs, aside from gaining access to experienced management teams of the SPAC sponsor.

What makes a good SPAC target company?

Industry

Although sector-agnostic, SPACs have specific industry mandates
SPACs are most popular within industrial, healthcare, consumer, energy and technology sectors
SPACs largely target high growth tech companies, given the high investor appetite for tech companies

Location

SPACs are increasingly looking at Southeast Asia, given the region's high growth market and is also home to a wide array of high growth tech companies
Young companies in North America and Europe have traditionally been key targets

Other factors

Companies with critical size, valued over US$200m are generally more in demand
Digital-driven companies with resilient business models and fast growth potential in the new world

Easier access to capital and potential to sell a bigger stake in the company

SPACs give private companies access to public markets, particularly during times of market instability, and help open the door to permanent capital. A SPAC raises capital through an IPO prior to acquiring a private company target. If it needs additional capital to complete the transaction with the private company target, it may raise funds through various vehicles, including a private investment in public equity (PIPE).

Additionally, SPAC transactions typically allow private company owners looking for an exit strategy a chance to sell a larger stake in a company than might otherwise be possible in a traditional IPO transaction.

Greater market certainty

Missing the right pricing “window” can have a significant impact on the success of a company’s traditional IPO. With SPACs, target companies can negotiate a “locked in” price of their stock with the SPAC sponsor as part of their agreement and avoid the potential valuation hit that can happen with traditional IPOs in times of market volatility.

Flexible deal terms

In addition to the ability to negotiate the sale price of the company to the SPAC, SPAC transactions provide flexibility to negotiate other parts of the deal. For example, if investors decide to withdraw their capital before the acquisition closes, SPAC sponsors might agree to fund any cash shortfalls at the time of closing.

Access to experienced managers

Partnering with a strong sponsor may allow a target company to benefit from its resources and experience. A seasoned sponsor may help when additional capital is needed. It may also tap into its network to build a strong management team for the target.

Potential for increased cost

When a SPAC is formed, it issues “units” in an IPO that consist of a share of common stock and a fraction of a warrant to purchase common stock that becomes exercisable once the SPAC transaction is completed. With the dilutive nature of the warrants, the economic cost of a SPAC transaction may exceed that of a traditional IPO.

Possible loss of control

The private company and its owner(s) may lose some control as the SPAC sponsor may negotiate representation on the board of directors and more active involvement in the post transaction company.

Public company readiness

A SPAC transaction will typically need to be completed within a shorter time frame and the timetable are usually set by the SPAC. This is in contrast with a traditional IPO where the timetable are controlled by the issuer. While the shorter window may mean the private company becomes publicly traded sooner, the set deadlines may place a high burden on the target company and its management team. This means a company going public via a SPAC merger will likely need to meet an accelerated public company readiness timeline when compared to a traditional IPO for substantially the same preparation, due diligence, prospectus-drafting, and regulatory oversight.

Getting ready for SPAC or de-SPAC

The compressed timeline to complete the de-SPAC transaction remains a key challenge for target company to get ready to operate as a public company. Although listing via a SPAC route pose an appealing fund raising alternative to traditional IPOs, it is important for target companies to understand the criterias and risks and assess their state of readiness to operate as a public company, just as they would do if they were to consider the traditional IPO route, and prepare themselves to navigate across these challenges.

How PwC can help

Strategic advice on essential commercial, financial and operational aspects in order to increase the potential as an attractive SPAC target.
SPAC merger readiness assessment to analyse your company’s state of readiness for the listing requirements, including assessment of existing systems, financial reporting procedures and corporate governance arrangements.
Guidance throughout the SPAC merger process including tax structuring and due diligence support, including review of the listing prospectus and offering circular.
Providing assurance on the historical financial statements, financial forecast and providing due diligence for the underwriters by means of comfort letter procedures on the historical financial information included in the prospectus.