How Singapore is approaching the SPAC opportunity

In the past few years, there has been a proliferation in the use of special purpose acquisition companies (SPACs) as a viable method of taking companies public in the US. A SPAC is essentially a shell entity created to raise money through an IPO. It has no underlying operating business and its sole purpose is to acquire or merge with a target company — usually a private one — within a set time frame, typically two years after the IPO.

SPACs have been touted as an alternative path to the public markets and many have been backed by high-profile sponsors, from Wall Street heavyweights and fund managers to celebrities and professional athletes.

An advantage of SPACs is that they provide investors the opportunity to collaborate with the SPAC’s sponsor and management team to invest in a low-interest rate environment and potentially enjoy significant upsides (should the SPAC successfully acquire or merge with a good target), while having limited downside risks (given that investors’ monies are placed in escrow pending the business acquisition and investors have the option to redeem their shares for the principal sum invested along with accrued interest).

From the target company’s perspective, the SPAC is often perceived as a faster and cheaper means to achieve a listing status compared with a traditional direct IPO. It also offers the target an opportunity to work with the SPAC’s more experienced management and industry professionals, which helps to achieve a successful transaction.

The boom in the use SPACs in the US has sparked concerns as to whether the phenomenon is sustainable or merely a bubble that is likely to burst soon. Some observers have cautioned against blindly jumping on the SPAC bandwagon, given that SPACs do not have any operating businesses prior to the business combination phase and lack a historical track record. Internal control, governance and accounting issues have also been flagged.

Another concern relates to the business combination: the target company may not be subject to the same level of professional due diligence and initial listing review and scrutiny by the relevant securities regulators compared with a traditional IPO.

The unfettered surge in the number of SPACs has led to worries that the market might not have sufficient high-quality private companies for the SPACs to combine with. This might result in the risk that some targets acquired are not of satisfactory quality and will fail to perform following the business combination, or that no business combination is consummated within the permitted time frame. Some SPACs in the US have also been subject to significant price volatility and speculative trading activity.

Developments in Asia

Notwithstanding the current frenzy in the US, SPACs are also increasingly attracting interest in Asia. Many US-listed SPACs are targeting high-value companies in Asia that are primed to go public as potential target acquisition or merger candidates. Many Asian tycoons and billionaires have also moved into the SPAC space, backing an increasing number of US SPACs.

Various Asian exchanges have started to consider rule changes to allow for the listing of SPACs. It has been reported that the Japanese authorities are considering whether to allow SPAC listings and the Indonesia Stock Exchange is considering passage of SPAC-related regulations by July 2021.1 Hong Kong is expected to have its SPAC-listing framework ready for public feedback in June 2021, with targets to allow deals to start by the end of this year.2

Proposed framework for Singapore SPAC listings

The Singapore Exchange (SGX) recently sought market feedback on a proposed regulatory framework for the listing of SPACs on the SGX Mainboard. This is not the first public consultation by SGX relating to the listing of SPACs: the last was in 2010, but that did not proceed further then.

The approach taken by the SGX in its proposed framework is to seek a balanced regime that effectively safeguards investors’ interests against some potential risks posed by the unique features of SPACs, while meeting the capital-raising needs of the market. Measures have been proposed to address some risks associated with SPACs, with the aim of creating credible listing vehicles that will increase investor choice and result in successful, value-creating combinations for their shareholders.

Some safeguards and applicable criteria proposed by the SGX for SPAC listings include the following:

• There must be a minimum market capitalization value of S$300m and at least 25% of the total number of issued shares must be held by at least 500 public shareholders at the IPO.
• There must be a minimum IPO price of S$10 a share.
• At least 90% of IPO proceeds must be placed in escrow pending the acquisition of a target company.
• Founding shareholders or the management team must hold a certain minimum equity at the IPO.
• There must be a moratorium on the shareholding interests held by the key parties, such as the founding shareholders and controlling shareholders.
• There must be a three-year permitted time frame from the IPO date to complete the business combination.
• The business combination must comprise at least one principal core business with a fair market value forming at least 80% of the gross IPO proceeds in escrow.
• The resulting business combination will have to meet the initial SGX Mainboard listing criteria.
• The business combination will require approval from a simple majority of the SPAC’s independent directors and a simple majority of the independent shareholders.
• The SPAC will need to appoint an accredited issue manager as a financial advisor to advise on the business combination and an independent valuer to value the target company.
• The shareholders’ circular on the business combination must contain prospectus-level disclosures.

Despite the US exchanges being front-runners in the SPAC space globally, the proposals demonstrate the SGX’s willingness to deviate from the framework currently adopted in the US where it views necessary. Some criteria proposed by the SGX are indeed more stringent than the current US requirements.  Such an approach to mitigate risks arising from SPACs as seen in the US and to protect the interests of sponsors and investors is commendable.

It will be interesting to see the final framework and rules for SPACs that are ultimately adopted and implemented by the SGX following the public feedback. More importantly, the extent to which market participants, regional entrepreneurs and investors accept Singapore SPAC listings as viable and attractive listing structures should be noted if that happens. As the saying goes, the proof is in the pudding.

The co-authors of this article are former Managing Director Evelyn Ang and former Director Wan Hong Chan.