7 May 2021
Singapore

Introduction

Special Purpose Acquisition Companies (“SPACs”) have become increasingly attractive and popular as an alternative listing structure in many jurisdictions. Singapore is attempting to ride this trend by introducing the Proposed Listing Framework for SPACs (the “Proposed SPACs Listing Framework”). While introducing SPACs as an alternative listing structure would increase Singapore’s attractiveness as an investment destination, the Singapore Exchange Limited (“SGX”) is also aware of the inherent risks of the SPAC structure and its uncertainties. SGX is proposing stricter rules than those in other jurisdictions so as to safeguard the interests of all parties involved.

What is a SPAC

SPACs are blank check companies with no prior operating history, operating and revenue-generating business or assets at the time of listing. SPACs are formed by investors to raise capital through an Initial Public Offering (“IPO”) process for the sole purpose of acquiring another target company through a business combination.

How a SPAC works

A SPAC is usually established and financed by experienced founding shareholders, known as sponsors, who possess industry-specific expertise or a proven track record. During the IPO process, investors invest in shares or units of SPACs. The units usually consist of shares of the SPAC and warrants or other convertible securities attached to them. A majority of the funds raised during the IPO process will be placed in an escrow account, to be utilised primarily for the consummation of the business combination.

After its IPO, the SPAC is given a permitted timeframe to search for a target company and complete the business combination. The SPAC’s shareholders will vote on the business combination.

If the business combination is completed within the permitted timeframe, the resulting issuer will continue its listing on the exchange. The SPAC’s shareholders may elect to redeem their shares pro rata in cash, or remain as shareholders of the resulting issuer. If the business combination is not completed within the permitted timeframe, the SPAC will be liquidated and the remaining funds in the escrow account will be returned to shareholders.

Rising Popularity of SPACs

Although SPACs have existed for decades, they have become increasingly popular in recent years as an alternative structure and means for private companies to obtain access to the capital markets. In the US, 248 SPACs were listed in the year 2020 alone, raising a total of USD82.4 billion, as compared to 209 traditional IPOs, which raised a total of USD85.2 billion. In January and February 2021, SPAC listings in the US raised a significantly greater amount of cash than traditional IPOs.[1]

Recently, Singapore-based Grab Holdings Inc. (“Grab”) announced that it will list on the US NASDAQ stock exchange through a merger with Altimeter Growth Corp, a SPAC sponsored by US-based Altimeter Capital. This is the largest-ever SPAC merger to date. Grab is valued at approximately USD40 billion, including about USD4 billion raised through private investment in public equity.[2]

The flexibility, efficiency and certainty offered by the SPAC structure has led to renewed interest in SPACs in various jurisdictions, including Singapore, Hong Kong and Japan. As SPACs do not possess any commercial operations at the time of listing, the IPO process is more straightforward. Sponsors are able to raise capital at the time of listing and undertake their business combinations at a later stage. Merging with SPACs through business combinations also provides target companies with access to the capital markets in a quicker and simpler manner than through traditional IPOs. Further, direct negotiations between SPACs and target companies reduce uncertainties associated with the valuation of target companies and the final offering price, which are often present in a traditional IPO process.

Inherent Risks of SPACs

Despite the advantages that SPAC structures offer, there are also various inherent risks which could potentially undermine their attractiveness as viable alternatives to traditional IPOs.

Firstly, the rush to complete a business combination within the permitted timeframe may lead to SPACs overpaying for target companies or seeking workable business combinations instead of trying to achieve the best possible deal. There is also uncertainty involved in a business combination as its completion is subject to shareholders’ approval.

Secondly, failure to complete a business combination within the permitted timeframe would result in a SPAC being liquidated and its funds being returned to shareholders. In such an event, shareholders will have to bear opportunity costs associated with their investments in the SPAC.

Thirdly, as seen from market practice in the US, SPACs often issue units consisting of shares and warrants or other convertible securities to shareholders. Shareholders who do not wish to remain in the resulting issuer subsequent to the business combination are able to redeem their shares for cash regardless of whether they vote for or against the business combination (“Redeeming Shareholders”). However, Redeeming Shareholders continue to retain warrants following the redemption of their shares despite their lack of economic or other contribution to the business combination or the resulting issuer. This means in the event that the Redeeming Shareholders exercise their warrants subsequent to the completion of the business combination, there is a risk that the shareholding interests of shareholders who do not elect to redeem their shares, and who remain in the resulting issuer post-business combination may be diluted or otherwise adversely affected.

SGX Launches Consultation on Proposed Listing Framework for SPACs

In 2010, SGX initiated a consultation on SPACs listings, but there was insufficient interest among businesses and investors at that time.

In light of the renewed interest in SPACs in recent years, SGX released the Proposed SPACs Listing Framework on 31 March 2021 and launched a public consultation exercise. The public is invited to offer their feedback and responses by 28 April 2021. Depending on the feedback received, SGX announced its intention to introduce a SPACs framework in Singapore by mid-2021.

Summary of the Proposed SPACs Listing Framework

In the consultation exercise, the SGX invited comments from members of the public on a number of proposed rules to be introduced in relation to the listing of SPACs on the Mainboard of the Singapore Exchange Securities Trading Limited (“SGX-ST”).

A summary of the main rules in the Proposed SPACs Listing Framework, and their respective rationales, is set out in the table below:

RationaleProposed Rule(s)
To ensure that a SPAC is backed by quality sponsors and/or management team

 

  • Minimum market capitalization – SPACs seeking to list on the Mainboard of the SGX-ST are required to have a minimum market capitalisation of SGD300 million at the time of listing.
To ensure orderly trading
  • Public float – At least 25% of a SPAC’s total number of issued shares must be held by at least 500 public shareholders at the time of the SPAC’s listing on the SGX-ST.
To encourage investors to carefully consider the risks of SPACs

 

  • Minimum issue price – A minimum issue price of SGD10 per share or unit of a SPAC offered during IPO shall be imposed.
To ensure sufficient time for completion of a business combination
  • Permitted timeframe for completion of business combination – The permitted timeframe for a SPAC to complete its business combination is proposed to be 36 months from the date of listing of the SPAC, consistent with the rules in other jurisdictions such as the US and Canada.
  • Extension of time – An extension of time for completion of a business combination is possible in exceptional circumstances, provided that a special resolution is passed by the independent shareholders of the SPAC (excluding the founding shareholders, management team and their respective associates (collectively, the “Key Persons”)), and an application for such extension of time has been made and granted by SGX.
To safeguard cash assets of SPACs raised at IPO
  • Funds placed in escrow account – At least 90% of gross proceeds raised from a SPAC’s IPO shall be placed in an escrow account operated by an independent escrow agent.
  • Use of escrowed funds – Funds in the escrow account may only be used for permitted investments and cannot be drawn down except in specific circumstances, such as the redemption of shares by shareholders who vote against the business combination and upon liquidation of the SPAC. Interest earned and income derived from funds in the escrow account may be drawn down for payment of the SPAC’s IPO-related administrative expenses, general working capital expenses and other expenses for the purposes of the business combination. In any other circumstances, a special resolution must be passed by independent shareholders of the SPAC (excluding the Key Persons) and SGX approval for the draw down will have to be obtained.
To ensure business combinations that are desirable and significant in size

 

  • Fair market value of target company – The fair market value of a SPAC’s initial acquisition shall be at least 80% of the amount held in the escrow account (excluding deferred underwriting commission and taxes payable on income earned on escrowed funds) at the time the binding agreement for the business combination transaction is entered into. Where the business combination transaction involves multiple concurrent acquisitions, at least one initial acquisition must fulfil this requirement.
  • Appointment of independent valuer – An independent valuer shall be appointed to value the business(es) or assets to be acquired under the business combination.
  • Approval of business combination – A SPAC’s business combination shall be respectively approved by (i) a simple majority of its independent directors; and (ii) an ordinary resolution passed by independent shareholders of the SPAC. The Key Persons shall not be permitted to vote on the business combination.
To ensure alignment of interests among key persons involved in the establishment or management of a SPAC (or resulting issuer), as well as independent shareholders of a SPAC (or resulting issuer)

 

  • Minimum equity participation – Founding shareholders and/or management teams of SPACs are required to subscribe to a minimum aggregate value of shares or units in the SPAC, to be calculated based on the SPAC’s market capitalisation at IPO.
  • Moratorium (following SPAC’s IPO) – Following a SPAC’s listing but prior to completion of its business combination, the Key Persons, as well as the controlling shareholders of the SPAC and their associates, shall observe a moratorium on the transfer or disposal of their direct and indirect effective shareholding interests in the SPAC.
  • Moratorium (following business combination) – For at least six months following the completion of the business combination, the following persons shall observe a moratorium on the transfer or disposal of their direct and indirect effective shareholding interests in the resulting issuer:
    1. the Key Persons, controlling shareholders of the SPAC and their associates;
    2. the controlling shareholders of the resulting issuer and their associates; and
    3. the executive directors of the resulting issuer with an interest in 5% or more of the resulting issuer’s issued share capital.
To safeguard investors, in particular shareholders remaining with the resulting issuer post-business combination, against dilution risks

 

  • Redemption rights – Only independent shareholders of the SPAC (excluding the Key Persons) who vote against the business combination (and not those who vote for or who do not participate in voting) may redeem their shares for cash if the business combination is completed within the permitted timeframe. Alternatively, limits shall be imposed on the exercise of redemption rights by independent shareholders of the SPAC who voted for the business combination. Redeemed shares shall be cancelled and any warrants accompanying such shares shall be nullified and void.
  • Liquidation distribution – In the event that the SPAC is liquidated, its pre-IPO investors (such as the Key Persons) shall waive their rights to participate in any liquidation distribution in respect of shares purchased by them prior to the SPAC’s IPO.
  • Non-detachable warrants – Warrants (or other convertible securities) shall be non-detachable from the ordinary shares of the SPAC. Alternatively, a maximum percentage cap on the resultant dilutive impact to shareholders of the resulting issuer (based on issued share capital of the SPAC at IPO) arising from the conversion of issued warrants (or other convertible securities) post-business combination may be imposed.
Other investor protection safeguards
  • Events of material change – If any event of material change (including changes to the profile of a SPAC’s founding shareholders and/or management team, replacement of a SPAC’s founding shareholders and/or management team and such other events as determined by SGX in its discretion) occurs before the completion of the business combination, which may be critical to the successful founding of the SPAC and/or successful completion of the business combination, the SPAC shall be liquidated and funds in the escrow account shall be returned to shareholders on a pro rata basis. The SPAC may only continue its listing on the Mainboard of the SGX-ST notwithstanding the event of material change if approval by special resolution of its independent shareholders has been obtained.
  • Listing requirements – The resulting issuer is required to meet the applicable initial listing requirements set out in the new proposed Mainboard Rule 210(11)(l)(vi), failing which it will be delisted.
  • Appointment of financial adviser – The SPAC shall appoint a financial adviser to advise on the business combination.
  • Disclosures – The SPAC’s founding shareholders and directors, the proposed directors of the resulting issuer and the financial adviser shall provide disclosures in the shareholders’ circular with regard to the business combination, in compliance with prospectus disclosure requirements under Part XIII of the Securities and Futures Act, as well as a responsibility statement. A draft copy of the circular must be submitted for SGX’s clearance.

 

Commentary

As SPACs become increasingly attractive and popular as an alternative listing structure in many jurisdictions, Singapore is attempting to ride on this trend with the introduction of the Proposed SPACs Listing Framework. Through the Proposed SPACs Listing Framework, SGX seeks to facilitate the listing of SPACs while mitigating the inherent and potential risks associated with SPAC structures.

On one hand, introducing SPACs as an alternative listing structure in Singapore would increase Singapore’s attractiveness as an investment destination for startups and companies in the technology sector and other new economy sectors. This is especially beneficial in enhancing the diversity of industries within which listed companies in Singapore operate, given the dominance of listed companies operating in old economy sectors and REITs. Allowing the listing of SPACs is also expected to provide greater investor choice, as investors are able to gain access to the stocks of companies which are in their early stages of growth, instead of having to wait till such companies are listed via the traditional IPO process.

At the same time, based on the Proposed SPACs Listing Framework, it is evident that SGX is aware of the possibility that the apparent benefits of introducing and listing SPACs in Singapore may be undermined by the inherent risks of the SPAC structure, as seen in other jurisdictions. In view of the various uncertainties associated with SPAC listings and business combinations, as well as the reliance placed by investors on sponsors and/or management teams of SPACs in making investment decisions, SGX has proposed stricter rules than those observed in other jurisdictions in order to safeguard the interests of independent investors and other parties involved.

Ultimately, it is hoped that any SPAC regime introduced in Singapore will be sufficiently robust and sustainable. As the listing of SPACs is a concept that has yet to be tested in Singapore, the rules in the Proposed SPACs Listing Framework, focusing on investor protection, are a good starting point. However, it is necessary to consider the impact of such rules on perceptions of Singapore’s overall attractiveness as a SPAC hub in Asia and in the world.

Indeed, a delicate balance must be struck between protecting the interests of investors and positioning Singapore as a SPAC hub to attract quality sponsors. While a strict regime is welcomed in ensuring that the SPAC structure is not abused as a backdoor means to a traditional IPO, Singapore’s SPAC regime should not be overly onerous such that it deters potential quality sponsors and investors.

As SGX’s public consultation exercise on the Proposed SPACs Listing Framework is ongoing at the time of writing of this article, it is hoped that feedback received from the public on the Proposed SPACs Listing Framework will offer some useful guidance in determining how a workable balance may be achieved. At the same time, investors should exercise caution and be mindful of the intrinsic risks associated with the SPAC structure in making their investment decisions.

 


 

If you have any questions or require any additional information, please feel free to reach out to Dr Qiu Yang or any director of ZICO Insights Law LLC. This article was prepared with the assistance of Ngim Dean Gee of ZICO Insights Law LLC.

This article is for general information only and is not a substitute for legal advice.

 

[1] Frank Holmes, ‘What Are SPACs, And Why Is Everyone Talking About Them Right Now?’ (Forbes, 22 March 2021) <https://www.forbes.com/sites/greatspeculations/2021/03/22/what-are-spacs-and-why-is-everyone-talking-about-them-right-now/?sh=3b0368f43260>.

[2] ‘Grab to list in the US through world’s biggest SPAC merger, valued at nearly US$40 billion’ Channel News Asia (13 April 2021) <https://www.channelnewsasia.com/news/business/grab-spac-listing-altimeter-capital-public-40-billion-14613732>.