SPACs On The SGX: An Insight into SGX’s Proposed Listing Frameworkby Fintech News Singapore August 5, 2021
In recent days, special purpose acquisition companies, or SPACs, have been growing in popularity among founders who are keen to take their companies public in a faster way than traditional initial public offerings (IPOs).
Grab, the Singapore-headquartered mobile technology company, announced in April 2021 its plans to go public through a merger with a SPAC, Altimeter Growth Corp for a value of $39.6 billion. Grab expects to complete the business combination in the fourth quarter of 2021. Tan Hooi Ling, the co-founder of Grab explained that although the firm opted to go public in the United States so it can tap into a larger investor base, they are not ruling out the possibility of a concurrent local listing.
SPACs are shell companies established by investors to raise money through an IPO to acquire one or more privately held companies. They are also known as ‘blank check’ companies. Although SPAC IPOs have been around since 1990, they recently gained popularity due to their many benefits for companies, investors, and sponsors alike. In the months of January to October 2020, approximately 165 global special purpose acquisition companies or SPACs were listed. This was almost twice the number of global SPAC IPOs that were issued in 2019, and five times more than 2015.
Recognising this fact, the Singapore Exchange (SGX) sought market feedback from 31 March to 28 April 2021 on its consultation paper for a proposed regulatory framework to list SPACs on the Mainboard of Singapore Exchange Securities Trading Limited (SGX-ST). It aims to propose measures to address the risks of SPACs and create credible listing vehicles that will increase investor choice and successful value-creating combinations for shareholders. SGX is proposing to provide for a primary listing of SPACs on the SGX-ST Mainboard but at the same time, SGX is also seeking feedback if SPACs should be permitted to apply for a secondary listing on the SGX-ST Mainboard.
Previously in January 2010, SGX had issued a public consultation paper on ‘Proposed Amendments to the Listing Rules’ (2010 Consultation) to seek feedback on the listing of SPACs on the SGX-ST Mainboard. Based on the response then, SGX decided that it was not the right time to introduce the listing of SPACs.
Now, more than ten years later, SGX believes that the introduction of SPACs may stand to benefit capital market participants and become a feasible alternative to traditional IPOs for fundraising in Singapore and the region. This article will provide an overview of the proposed listing framework by SGX, which took into consideration feedback received from the 2010 consultation.
Admission and Related Criteria
1) Additional Admission Criteria
Apart from fulfilling the existing admission criteria for a primary listing on the SGX-ST Mainboard, the additional admission criteria are as below:
Minimum Market Capitalisation: It is proposed that the SPAC must meet a minimum market capitalisation of S$300 million, computed based on the IPO issue price and post-invitation issued share capital.
Public Float: At least 25% of the SPAC’s total number of issued shares is to be held by at least 500 public shareholders at the time of the SPAC listing on the SGX-ST. This is to ensure that there is sufficient free float for orderly trading.
Minimum Issue Price: Instead of the existing minimum issue price of S$0.50 for securities offered for a Mainboard listing, a higher minimum issue price of S$10 per share or unit for the securities offered for the SPAC
IPO is proposed. The proposed higher amount is based on the typical pricing of SPACs listed in the United States, which is generally fixed at an IPO price of US $10 per share or unit.
Jurisdiction of Incorporation and Dual Class Share Structure: It is proposed that a SPAC seeking a primary listing on the SGX-ST Mainboard must be incorporated in Singapore and the adoption of a dual-class share structure for the IPO is not permitted.
2)Suitability Assessment Factors of a SPAC
Among the proposed factors that SGX will consider in assessing the suitability of a SPAC include:
- The profile including the track record and repute of the founding shareholders
- Experience and expertise of the management team of the SPAC
- Nature and extent of the management team’s compensation
- Equity ownership of the founding shareholders and the management team
- Alignment of interests of the founding shareholders and the management team with the interest of other shareholders
- Time permitted for completion of the business combination
These factors are alike to those adopted by exchanges that permit the listing of SPACs, and guidance on these factors are detailed in the ‘Proposed Practice Note 6.4’ under Appendix 2 of the consultation paper.
3) Permitted Time Frame for Completion of Business Combination
The maximum time frame for a SPAC to complete a business combination is within 36 months from the date of listing. However, an extension of time may be permitted under exceptional circumstances and a special resolution must be passed by independent shareholders, excluding the founding shareholders, management team, and their associates. Concurrently, the SPAC must apply to SGX for this extension of time.
4) Minimum Percentage of IPO Proceeds Held in an Escrow Account
The SPAC must place at least 90% of the gross proceeds that were raised from its IPO in an escrow account to ensure that the majority of its cash assets are safeguarded until the completion of the business combination.
The funds in the escrow account, interest earned, and the income derived from such funds cannot be drawn down before the completion of the business combination, except for specified circumstances. The escrow account must be opened with and operated by an independent escrow agent, which is part of a financial institution licensed and approved by the Monetary Authority of Singapore.
5) Fair Market Value of the Target Company Relative to the Amount in Escrow Account
The business combination undertaken by a SPAC must comprise of an initial acquisition of a business or asset with a fair market value forming at least 80% of the amount held in the escrow account (excluding amounts representing deferred underwriting commission and any taxes payable on the income earned on the escrowed funds). Additionally, an independent valuer shall be appointed to value the business (es) or asset(s) to be acquired under the business combination.
6) Minimum Equity Participation
The founding shareholders and the management team will be subjected to a minimum aggregate subscription value that is dependent on the market capitalisation size of the SPAC at IPO (based on the IPO issue price), as per the table below:
|Market Capitalisation of the SPAC (S$ million (“M”)||Aggregate minimum value of shares or units subscribed based on the IPO issue price (S$ million)|
|300 ≪ M < 500||10|
|500 ≪ M < 1,000||15|
|M ≫ 1,000||20|
7) Period of Moratorium
The proposed moratorium requirements are as below:
Following the SPAC’s IPO: For the founding shareholders, management team, controlling shareholders, and their respective associates to observe a moratorium on the transfer or disposal of all or part of their direct and indirect effective shareholding interest held in the SPAC as at the date of the SPAC’s listing until the completion of the business combination.
Following the Business Combination: It is proposed that the SPAC’s founding shareholders, the management team and their respective associates, the controlling shareholders and their associates as well as the executive directors of the resulting issuer with an interest in 5% or more of the issued share capital, to observe a moratorium on the transfer or disposal of all or part of their direct and indirect effective shareholding interest held in the resulting issuer for at least 6 months from the date of the completion of the business combination. Additionally, the issuer and the financial advisor who have been appointed to advise on the business combination must demonstrate the appropriateness of the proposed moratorium period to ensure the alignment of interests of the aforementioned persons with that of other shareholders of the resulting issue.
8) Approval(s) Required for Business Combination
It is proposed by SGX that the business combination must be approved by:
- A simple majority of independent directors’ approval; and
- Approval by an ordinary resolution passed by independent shareholders.
The founding shareholders, management team, and their respective associates will not be considered independent. This exclusion is to ensure that the business combination transaction is conducted on terms that are not prejudicial to the interests of the SPAC’s and independent shareholders.
Proposals to Safeguards Against Dilution Risks
1)Redemption and Liquidation Distribution Rights of Shareholders
Redemption Right: Only independent shareholders who vote against the business combination have the right to elect to redeem their ordinary shares and subsequently receive a pro-rata portion of the amount held in the escrow account in cash if the business combination is approved and completed within the permitted time frame. SGX is of the view that independent shareholders who vote for the business combination should not be afforded a redemption right as they have to stand by their voting decisions.
Liquidation Distribution Right: It is proposed that a SPAC be liquidated if it is unable to complete the business combination within the stipulated time frame or obtain specific independent shareholders’ approval for an Event of Material Change in relation to the profile of the founding shareholders and/or the management team before completion of the business combination. In the event of liquidation, the remaining funds in the escrow account are to be returned and distributed in cash to:
- All independent shareholders on a pro-rata basis, equal to their respective share of the amount in the escrow account at the time of the liquidation distribution; and
- The founding shareholders, the management team, and their respective associates in respect of shares purchased after the SPAC’s IPO.
2)Requirement to Mitigate Dilution to Shareholders Remaining with the Resulting Issuer
In addressing concerns on dilution risks in the event of accompanying warrants conversion (if any) after the business combination, two options have been proposed by SGX, which are:
- For the warrants (or other convertible securities) which are issued with the SPAC shares at IPO to be attached to the underlying ordinary shares and traded as a single unit on the SGX-ST Mainboard. Upon the exercise of the redemption right by shareholders who voted against the business combination, the warrants (or other convertible securities) will be nullified and void.
- Alternatively, a maximum percentage cap is to be imposed on the resultant dilutive impact to shareholders after the business combination arising specifically from the exercise of conversion rights under the warrants (or other convertible securities).
Proposals for Other Investor Protection Safeguards
1) Event of Material Change Occurring Prior to Completion of Business Combination
In the event a material change occurs in relation to the profile of the founding shareholders and/or the management team before the completion of the business combination, it is proposed for a liquidation mechanism be put in place, as this is a critical factor to the successful founding of the SPAC or completion of business combination. An approval by a special resolution of the independent shareholders will also be required for the material change.
2) Limit on Sponsor’s Promote
It is proposed that a limit on sponsor’s promote is unnecessary, given the other safeguards that have been proposed to align the interests of independent shareholders with the founding shareholders and the SPAC’s management team.
3) Requirement for the Resulting Issuer to Meet Initial Listing Requirements
It is proposed that the resulting issuer from the successful business combination must meet the applicable initial listing requirements under Chapter 2 of the Mainboard rules, which includes quantitative admission criterion, public spread and distribution requirements, and qualitative requirements such as the character and integrity of directors, executive officers, and controlling shareholders. If the resulting issuer is unable to meet the initial listing requirements, the securities of the SPAC will be delisted.
Requirement to appoint a financial adviser for the business combination:
A financial adviser, who is an issue manager, must be appointed by the SPAC to advise on the business combination, including taking guidance from the Association of Banks in Singapore (ABS) Listings Due Diligence Guidelines to conduct its due diligence for the business combination transaction. This is to obtain a certain level of assurance on the quality of the business combination.
Full and true disclosures in the circular in relation to the business combination:
To ensure that independent shareholders have sufficient information to approve the business combination, it is proposed for the shareholders’ circular seeking their approval to contain prospectus-level disclosures on information in key areas of:
- Financial position and operating control of the resulting issuer
- Character and integrity of the incoming directors and management of the resulting issuer
- The compliance history of the resulting issuer
- The resulting issuer’s possession of material licenses, permits, and approvals required to operate the business
- Resolution and mitigation of conflicts of interests.