The Full Guide to Listing SPACs in SGX

Special Purpose Acquisition Companies (“SPACs“) are companies, at the point of their proposed listing on the Singapore Exchange (“SGX“), without an operating history, business or assets generating revenues. The listing is undertaken primarily to raise capital to acquire a business or businesses, as the case may be, and complete a business combination.?In this Guide, I set out the key requirements, both quantitative and qualitative, for the listing of a SPAC on the SGX.

Key Requirements

Jurisdiction

It is not a requirement for a SPAC to be established in Singapore. This means that a corporation or a corporate entity incorporated outside of Singapore can be used as a SPAC and listed on the SGX. Nevertheless, to ensure that investors are still protected, the SGX will assess whether the jurisdiction that the potential SPAC is from has investor protection laws and liquidation rights bestowed upon investors which are similar to those provided for in Singapore’s legislative regimes.

Minimum Issue Price

The IPO (as defined below) issue price must be at least S$5. For SPACs, the IPO issue price refers to the price of each security. Each security that will be issued may consist of a share and a warrant (or any other convertible securities).

Minimum Market Capitalisation

The minimum market capitalisation to be admitted for SPAC listing on SGX is S$150 million. Thus, any potential SPAC has to fulfill this quantitative threshold before it can be admitted onto the SGX.

SPAC’s Market Capitalisation: IPO issue price x Share Capital of the SPAC (issued after the invitation)

It has been noted that there was a lot of discussion regarding the quantum of minimum market capitalisation. It was first suggested that S$300 million would be appropriate. However, industry observers had noted that a typical business combination would be at least triple the initial SPAC size.

Thus, a S$300 million threshold would result in a target pool of companies with at least S$900 million, a figure that unduly narrows the pool of target companies in Asia. Therefore, to expand the pool of targets, the threshold was lowered to S$150 million (target companies now need only be worth at least S$450 million and above) – something that would provide a healthy pool of targets for SPACs to undertake their business combination with.

Shareholding

At least 300 public shareholders must hold 25% or more of the total number of issued shares of the SPAC (excluding treasury shares).

Promote

The promote refers to the sponsor’s right to obtain further equity in a SPAC in exchange for sponsoring the SPAC. SGX has imposed a sponsor’s promote limit of up to 20% of the SPAC’s issued share capital (on a fully diluted basis).

Escrow Account

As the SPAC is listed on the SGX for the purpose of raising capital, it will invariably have to deal with the funds raised from the listing exercise. The listing rules now mandate that the SPAC must immediately deposit at least 90% of the gross funds raised during the IPO into an escrow account. This escrow account must be with an independent escrow agent, regulated and approved by the Monetary Authority of Singapore. The remainder can be used for payment towards administrative expenses and general working capital expenses.

These funds in escrow can only be withdrawn upon the occurrence of certain events, such as?a business combination or the liquidation of the SPAC. During the period between the fund being deposited into the escrow account and the withdrawal of such funds, the SPAC (through the escrow agent) will be entitled to invest the funds only in permissible investments.

Such investments include short-dated securities having a rating of A-2 or higher.?A short-term obligation rated ‘A-2’ by a rating agency is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

Timeframe

Generally, the SPAC must conclude a business combination within 24 months of its initial public offering (“IPO”) to ensure that SPACs are driven to find acceptable candidates for the business combination as soon as possible. However, there are provisions to allow for an extension beyond this 24-month period:?

(a) Automatic extension:?Subject to a total timeframe of 36 months from the date of IPO and the fulfillment of certain prescribed conditions, if the SPAC enters into a definitive agreement for a business combination prior to the expiry of the 24-month period, the SPAC automatically has up to 12 months from the relevant deadline to conclude the business combination. This automatic extension has been instituted to allow the SPAC to concentrate on due diligence and the execution of the business combination without having to worry about obtaining shareholder approval for the time extension.

(b) Non-automatic extension:?On the flip side, if the SPAC has not reached a definitive agreement for the business combination by the expiry of the 24-month period and needs to have more time to find a suitable business to acquire, it must obtain the necessary approvals from SGX and shareholders. A majority of at least 75% of the votes cast by shareholders at a general meeting would be required for shareholder approval.

Minimum Equity Participation

The SPAC’s sponsor and management team must subscribe for a minimum value of equity securities (on aggregate) in accordance with the following requirements:

Market Capitalisation (S$)?????????????????????????????????????? Proportion of subscription

More than or equal to 150 million, but less than 300 million???????????3.5%

More than or equal to 300 million, but less than 500 million???????????3.0%

More than or equal to 500 million??????????????????????????????????????? ?2.5%

The minimum equity participation guarantees that the interests of the sponsor and management team are aligned with the other investors. SGX has not defined the manner or timing of how such people would complete their equity participation to allow for flexibility.

Special Purpose Acquisition Companies (“SPACs“) are companies, at the point of their proposed listing on the Singapore Exchange (“SGX“), without an operating history, business or assets generating revenues. The listing is undertaken primarily to raise capital to acquire a business or businesses, as the case may be, and complete a business combination.

Approvals

The acquisition of a company (or companies) is commonly referred to as a “business combination”. The business combination must be approved by:?

1. a simple majority of the independent directors of the SPAC (> 50%); and
2. an ordinary resolution passed by the shareholders of the SPAC at a general meeting (> 50%)?

All shareholders are allowed to vote on the business combination based on their individual SPAC holdings. This includes the sponsor, management team, and their respective associates. However, it excludes the promote. The sponsor and the management team are not authorized to vote on the business combination using shares bought for little or no consideration prior to or at the SPAC’s IPO.

Warrants

Each SPAC security may consist of a share and a warrant. The warrants can be detached from the shares, allowing the shares and warrants to be traded independently of each other.

The detachability of the warrants mirrors the framework adopted in the US. It provides investors with the option to trade or retain the warrants (to be exercised for additional shares after the business combination). Thus, this allows investors to profit from either (a) selling the warrants, or (b) exercising the warrants for additional shares and then selling them at a price potentially higher than the issue price. Essentially, the warrants compensate investors for taking the risk of investing in the SPAC for up to 36 months.

Despite the potential benefits of the detachability of the warrants, it risks diluting the existing investors’ shareholdings upon conversion of the warrants. To address this issue, SGX has introduced a cap on the maximum dilution to shareholders upon such conversion. The maximum dilution to shareholders is limited to 50% of the SPAC’s issued share capital (including the promote).

Further, SGX has announced that it is open to relaxing the 50% dilution cap on a case-by-case basis. This is only if the SPAC can provide good reasons to do so.?

Independent Valuation

Following stakeholder feedback, SGX has concluded that when a Private Investment in Public Equity (PIPE) investment is made, an independent valuation of the target is not required. PIPE refers to when the SPAC’s securities are sold in a private transaction to institutional and/or accredited investors. This means that PIPE investors provide additional supervision and accountability.

As a result, the appointment of an independent valuer to value the target company is only required for limited scenarios. One example is when the private placement of the SPAC’s securities does not occur at the same time as the business combination.

Value of Target

To determine whether the 80% threshold has been met, SGX will first compute the total value of the funds in the escrow account subsisting at the point in time when the binding agreement for the acquisition has been entered into. Thereafter, SGX will compare the value of the acquisition to the total value of the funds in escrow. If multiple acquisitions are needed to satisfy the 80% threshold in aggregate, SGX would consider a waiver of the threshold only on a case-by-case basis.

Redemption

SGX did not attach the redemption rights to the shareholders’ voting decisions on the business combination. These redemption rights play a vital role in providing protection for investors. Such investors/shareholders are allowed to redeem their SPAC shares and receive a pro rata portion of the escrow account balance. This is regardless of whether they voted in favour of or against the business combination.

Liquidation

Where the SPAC is unable to complete a business combination within the prescribed timeframes, or where it fails to obtain the relevant approvals for the business combination or where SGX orders the SPAC to delist, the SPAC will be liquidated.

Upon liquidation, the outstanding funds will be distributed on a pro rata basis back to (a) the independent shareholders and (b) the founding shareholders and the management team.

The shareholders in (b) have to waive their right to participate in the distribution in respect of any equity securities owned by them before the IPO or derived from the IPO. They can only receive distributions from equity securities obtained post-IPO.

Conclusion

The new SPAC framework represents the broadening and deepening of our capital markets. In particular, SPACs democratize private equity and venture capital investments by being offered to a broader set of investors (i.e. retail investors) and enhance SGX’s capital market offerings. In light of the foregoing, the SGX’s SPAC framework is a welcome addition to our capital markets as it achieves a reasonable balance between investor protection, increased liquidity, and improved capital market attractiveness.

This Guide was first published in Asia Law Network as a two-part series.

You can access the articles here: https://learn.asialawnetwork.com/2021/09/23/guide-listing-spac-sgx-part-1/ & https://learn.asialawnetwork.com/2021/10/08/guide-listing-spac-sgx-part-2/

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Saravanan Rathakrishnan is a lawyer who specializes in investments funds, family offices, and mergers & acquisitions. He is the author of several journal articles focusing on the law, geopolitics, and finance/economics.