On August 15, 2008, the Toronto Stock Exchange (TSX) published for comments proposed new rules regarding the listing on the exchange of special purpose acquisition corporations (SPACs). SPACs are characterized by the fact that, at the time of their initial public offering (IPO), they have no business operations but intend to acquire a yet unidentified operating business. Currently, the TSX requires companies seeking listing to have an existing business and prescribed operating profits. The proposed rules on SPACs follow the introduction of similar rules by the NYSE and the American Stock Exchange and proposed rules of NASDAQ. Comments on the TSX rules must be received by the TSX by September 15, 2008.
As contemplated by the proposed rules, the listing of a SPAC on the TSX will be a two-stage process. First, a prospectus relating to the securities of the SPAC will be filed and cleared with the relevant securities authorities. Upon successful completion of the IPO, the SPAC securities will be listed on the TSX. At least 90% of the IPO gross proceeds must be held in trust pending consummation of a "qualified acquisition". Second, the SPAC will identify and, subject to securityholder approval, complete a qualifying acquisition within 36 months of the closing of the IPO. Prior to seeking securityholder approval, a prospectus reflecting the proposed acquisition must be approved by the securities regulatory authorities. An information circular must then be sent to shareholders inviting them to vote on the qualifying acquisition. If such an acquisition is not completed within the prescribed time frame, the IPO proceeds held in trust must be returned to investors holding securities originally purchased in the IPO.
THE INITIAL PUBLIC OFFERING AND ORIGINAL LISTING REQUIREMENTS
In order to qualify the sale of SPAC securities, a prospectus must be cleared with the relevant securities regulatory authorities and a listing application filed with the TSX. A SPAC must raise a minimum of C$30,000,000 through an IPO of shares or units.
Prior to listing, the founding securityholders of the SPAC must subscribe for securities of the SPAC representing an aggregate equity interest of at least 10% of the SPAC immediately following the closing of the IPO. The terms of this initial investment must be disclosed in the IPO prospectus. The founding securityholders will typically purchase this interest in advance of the IPO at a price per security that may be significantly less than the price the securities are offered in the IPO. Such securityholders must agree not to transfer any of their securities prior to the completion of a qualifying acquisition by the SPAC. They must also agree that their securities will not participate in any liquidation of the SPAC unless the securities were purchased as part of the IPO. There is no maximum limit on the position the founding securityholders may take in the SPAC, but the TSX may refuse listing if their position is excessive. Generally, positions in excess of 20% (excluding IPO securities) will be considered excessive by the TSX. If units are to be offered, each SPAC unit must consist of one share and no more than two share purchase warrants.
A SPAC that seeks listing on the TSX must not carry on an operating business. It may be in the process of reviewing potential qualifying acquisitions, but it may not have entered into any binding or non-binding agreement, either oral or written, regarding a potential acquisition. A statement to this effect must be made in the IPO prospectus. If a target business sector or geographic area has been identified by the SPAC, this must be disclosed in the IPO prospectus.
Generally, the TSX recommends that SPACs be incorporated under Canadian federal or provincial corporate laws. If a SPAC seeking listing is incorporated outside Canada, the opinion of the TSX should be sought prior to filing a listing application for the SPAC.
Once an IPO has been completed, the SPAC must deposit at least 90% of the gross proceeds with a trustee unrelated to the transaction and acceptable to the TSX. The 90% threshold is the same threshold adopted by the NYSE. The trustee must invest the trust funds in "permitted investments" and the nature of such investments must be disclosed in the prospectus. The 10% of proceeds which are not placed in trust and the interest earned on the trust's investments may be applied to the payment of administrative expenses incurred in connection with the IPO and the identification and completion of the qualifying acquisition. The trust indenture must provide for the release of the trust funds to the SPAC if a qualifying acquisition is completed within the prescribed period and, if not, then the trust must distribute the funds pro rata to securityholders. Founding securityholders may not participate in the distribution in respect of their founding securities. The form of trust indenture must be pre-cleared with the TSX.
The proposed TSX rules prescribe the following additional conditions:
Minimum Listing Requirements: At the time of listing, at least 1,000,000 freely tradeable securities of the SPAC having an aggregate market value of C$30,000,000 must be held by at least 300 public holders, holding at least one board lot each. The minimum price of the securities of a SPAC seeking listing on the exchange is C$5.00 per share or unit.
By comparison, the NYSE rules provide that "acquisition companies" (ACs) must have an aggregate market value of US$250,000,000 (excluding shares held by directors, officers, or their immediate families and other concentrated holdings of 10% in the share capital of the AC) and a market value of publicly held shares of US$200,000,000 (excluding shares held by directors, officers, or their immediate families and other concentrated holdings of 10% in the share capital of the AC). There must generally be at least 1,100,000 publicly held shares (excluding shares held by directors, officers, or their immediate families and other concentrated holdings of 10% in the share capital of the AC) and at least 400 holders of at least one board lot. An AC must also have an IPO price of at least US$4.00 at the time of listing.
Conversion Feature: In order to be successfully listed on the TSX, the securities of the SPAC must contain a conversion feature. This provision must allow securityholders, other than founding securityholders, who vote against a proposed qualifying acquisition to convert their securities, in the event that the qualifying acquisition is approved, into a pro rata share of the trust funds (net of applicable taxes and direct costs of conversion).
Liquidation Feature: SPAC securities must also have a liquidation distribution feature which provides that securityholders, other than founding securityholders in respect of their founding securities, shall receive a pro rata portion of the funds held in trust (net of applicable taxes and direct costs of liquidation) in the event a qualifying acquisition is not completed within 36 months of the closing of the IPO.
Warrants: Where units consisting of shares and share purchase warrants are issued in the IPO, such warrants may not be exercised prior to the completion of the qualifying acquisition and must expire on the earlier of a fixed date specified in the IPO prospectus and the date on which the SPAC fails to meet the timelines for a qualifying acquisition. Warrants do not give entitlement to proceeds upon the liquidation of the SPAC.
Financing: Until a SPAC completes its qualifying acquisition, no debt financing may be obtained other than ordinary course short-term trade or accounts payable. A credit facility may be entered into prior to the completion of a qualifying acquisition but may only be drawn down contemporaneously with or after completion of the qualifying acquisition.
Deferral of Underwriters' Commission: To ensure that the interests of the IPO underwriters and SPAC investors are aligned, the underwriters must defer and place in trust a minimum of 50% of their IPO commissions. Such funds will only be released to the underwriters upon completion of a qualifying acquisition. If the acquisition is not completed within the required timeline, then such deferred commissions will be distributed to the holders of the securities originally purchased in the IPO, rather than the underwriters, as part of the liquidation. In addition, securityholders exercising their conversion rights are entitled to their pro rata portion of the trust funds, including any underwriters' commission.
ONGOING LISTING REQUIREMENTS PRIOR TO QUALIFYING ACQUISITION
To prevent dilution during the period after completion of the IPO but prior to the completion of the qualifying acquisition, any further securities of the SPAC must be issued by way of a rights offering to existing securityholders. Ninety percent of funds raised by an additional offering must also be placed into trust. A SPAC may not have any security-based compensation arrangements in place prior to the completion of a qualifying acquisition. Securityholder approval of any security-based compensation plan will be required before such a plan is implemented. A SPAC will also be subject to the ongoing listing requirements of the TSX, other than those specifically related to operating businesses.
As set out above, a qualifying acquisition must be undertaken within 36 months of the date of closing of the IPO. The value of the qualifying transaction must represent at least 80% of the value of funds held in trust. Multiple acquisitions may be used to satisfy this requirement, but they must close concurrently.
An acquisition may only be completed if a majority of the securityholders approve it at a meeting duly called for that purpose. The founding securityholders are not allowed to vote any of their securities with respect to the approval of the acquisition. Additional conditions may be imposed on the approval of a qualifying acquisition by the SPAC, provided they are set out in the IPO prospectus. Unlike NYSE, the TSX has imposed no restriction on completion of a qualifying transaction even if in excess of a specified percentage of securityholders exercise their conversion rights.
The information circular describing the proposed acquisition must be submitted to the TSX for pre-clearance and will be required to include prospectus-level disclosure regarding the target company. While the information circular would not generally be subject to a review by the relevant Canadian securities regulatory authorities, the proposed rules require SPACs to file and obtain a receipt for a final prospectus regarding the SPAC, which prospectus assumes completion of the qualifying acquisition. Such a receipt must be obtained prior to mailing of the information circular to securityholders. If a listed company does not meet the prescribed deadlines in completing the qualifying acquisition, then it must complete a liquidation distribution within 30 days of such failure. The SPAC would then be delisted.
The development of TSX standards with respect to the listing of SPACs is welcome and, if implemented, will bring the TSX into line with the major U.S. exchanges. As of the end of April of this year, U.S. SPACs had raised US$18.6 million from their IPOs. Unlike reverse takeovers SPACs provide a clean investment vehicle, as they have no business at the time of listing. Investors may also benefit from SPACs being subject to public company governance and disclosure standards and from the involvement of experienced management and sponsors. Such vehicles may also be attractive as an alternative to private equity for potential target companies.
To access the Notice of the TSX which includes the text of the proposed rules, click here. Ogilvy Renault will be providing comments to the TSX. If you have any comments or concerns regarding the rules, please contact us.
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