The TSX is proposing to permit the listing of special
purpose acquisition corporations. SPACs are shell companies
that raise capital in an IPO with a mandate to acquire an
operating business within a specified period of time. They are
similar to capital pool companies (CPCs) listed on the TSX
Venture Exchange, but SPACs are much larger than CPCs in terms
of IPO proceeds and the size of the acquired business. The
TSX's proposal to permit SPAC listings follows the
growing market acceptance of SPACs in the United States, where
the NYSE and AMEX permit, and Nasdaq will soon permit, SPAC
listings. Comments on the TSX proposal are due by September 15,
2008. The proposed rules are also subject to Ontario Securities
Overview of SPACs Under Proposed TSX Rules
A SPAC must raise IPO proceeds of at least $30 million,
with a minimum price per security of $5.
Within three years of the IPO, the SPAC must acquire one
or more operating businesses with a combined minimum value of
approximately 80% of the IPO proceeds, with the resulting
issuer meeting TSX's original listing criteria.
Founding securityholders' equity interest in the
SPAC must be at least 10%.
The acquisition must be approved by securityholders,
Securities issued in the IPO must have a conversion right
and liquidation distribution feature, described below.
Market Conditions for SPACs
In the United States, 2007 was an important year for SPACs,
when they made up approximately one-quarter of IPOs. SPAC
financings continued in the first quarter of 2008, when the
NYSE and Nasdaq announced their intention to begin listing
them. Since then, the SPAC IPO market has weakened, and some
SPACs that recently went public are still seeking operating
businesses to acquire. According to the TSX, as of April 2008,
approximately US$18 billion of IPO proceeds have been raised by
SPACs that haven't yet completed an acquisition. Given
the continuing tight credit conditions constraining other
potential buyers, SPACs – which by definition are
clean shell companies with cash on hand and a limited period of
time in which to acquire an operating company – could
play an active role in M&A activity in the future.
Investor Protection Mechanisms
The TSX's proposed listing requirements contain
several investor-protection mechanisms, which are meant to
compensate for SPACs' lack of financial and operating
history. These features are consistent with U.S.
The information circular to be mailed to securityholders
regarding their approval of an acquisition will have to contain
prospectus-level disclosure relating to the operating business
and be precleared by the TSX. In addition, prior to mailing the
information circular, a prospectus containing full, true and
plain disclosure regarding the resulting issuer, assuming
completion of the acquisition, will have to be cleared with
Liquidation Distribution and Conversion Rights
A minimum of 90% of a SPAC's IPO proceeds must be
deposited in trust for the future acquisition. The trust fund
must also include 50% of the underwriters' IPO
commissions, to be released upon completion of the acquisition.
If an acquisition is not completed within the time required,
the SPAC must return the trust funds to securityholders
– this is the liquidation distribution feature. If an
acquisition is completed, securityholders who voted against it
will be entitled to exchange their securities for a pro rata
portion of the trust funds – the conversion right.
Founding securityholders will not be entitled to participate in
any liquidation distribution or conversion right.
80% Minimum Acquisition
If any securityholders exercise their conversion right, this
will necessarily reduce the amount of proceeds available to
fund the acquisition. Consequently, the SPAC may be unable to
complete an 80% acquisition without additional debt or equity
financing. Additional financing is permissible under the
TSX's proposed rules, but it may only be obtained
concurrently with, not in advance of, the acquisition. Multiple
acquisitions are also permitted if necessary to reach the 80%
threshold, but they must each be approved by securityholders
and they must close concurrently.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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