In February 2008, the NASDAQ Stock Market ("NASDAQ") issued a proposal, which was subsequently amended in March 2008, to allow the listing of special purpose acquisition companies ("SPACs"). Similarly in March 2008, the New York Stock Exchange ("NYSE") also proposed a rule change that would open its doors to SPACs.

SPACs, also known as blank-check companies, are companies without business operations that raise money through initial public offerings ("IPOs") to have their shares publicly traded for the sole purpose of seeking out a business combination or combinations with operating businesses. Their business plans are presented to potential investors in the IPOs without identifying specific business combination or combinations. However, when SPACs locate specific business combination or combinations they wish to enter into, they will present such proposal(s) to holders of their shares for approval.

Until recently, U.S. SPACs were confined to trading on the OTC Bulletin Board with some listed on the American Stock Exchange ("Amex"). As the size of SPACs financed and the prominence of their sponsors has increased, however, their stature has grown. Moreover, SPACs have become one of the only bright spots in the recent IPO market.

NASDAQ's Proposed Rule Change, as Amended

NASDAQ has applied its discretionary authority in the past to deny listing of SPACs as a matter of policy, despite the fact that SPACs technically can meet NASDAQ's initial listing requirements. In February 2008, however, NASDAQ filed with the Securities and Exchange Commission ("SEC") a proposed rule change, which NASDAQ amended in March 2008, under which NASDAQ would permit the listing of SPACs if they meet all applicable initial listing requirements. Thus, for initial listing, SPACs seeking to list on the NASDAQ Global Market must have a minimum market value of listed securities of $75 million, and SPACs seeking to list on the NASDAQ Capital Market must have a minimum market value of listed securities of $50 million.1 Moreover, SPACs seeking to list must also meet the following conditions:

  • Gross proceeds from the IPO must be deposited in a trust account maintained by an independent trustee, an escrow account maintained by an "insured depository institution" (as defined in the Federal Deposit Insurance Act) or in a separate bank account established by a registered broker or dealer
  • Within 36 months of the effectiveness of its IPO registration statement, the SPAC must complete one or more business combinations having an aggregate fair market value of at least 80 percent of the value of the deposit account (excluding any deferred underwriters' fees and taxes payable on the income earned on the deposit account) at the time of the agreement to enter into the initial combination
  • Each business combination must be approved both by a majority of the common stock shares and by a majority of its independent directors, as long as the SPAC is in the acquisition stage

To assure that it remains appropriate to continue to list a SPAC, NASDAQ will review the SPAC (pro forma) in connection with each of its business combinations. Unlike other listed companies, a SPAC must meet the initial listing requirements (as opposed to the less burdensome continued listing requirements) after each business combination. NASDAQ will also conduct a regulatory review of any individuals that become newly involved with the SPAC.2 If a SPAC cannot meet the requirements for initial listing following a business combination, or if it does not comply with any of the requirements set forth above, NASDAQ will proceed to delist the SPAC's securities. Finally, a listed SPAC must observe NASDAQ's corporate governance requirements for listed companies.

NYSE's Proposed Rule Change

Currently, the NYSE does not have a financial listing standard under which a SPAC could list.3 The NYSE, however, filed a proposed rule change with the SEC in March 2008 that contains a new listing standard specifically for SPACs. Under the proposed new rule, a SPAC seeking to list would need to demonstrate a total market value of $250 million and a market value of publicly held shares of at least $200 million (excluding shares held by directors, officers, or their immediate families, and other concentrated holdings of 10 percent of more). Furthermore, even though they would not need to have any prior operating history4, SPACs would have to meet the same distribution criteria applicable to all other IPOs. After the SPACs are listed, as under the NASDAQ proposal, all of the NYSE's corporate governance requirements applicable to operating companies would apply to the listed SPACs as well.

The proposed rules would subject SPACs seeking to list on the NYSE to, among other things, the following minimum requirements:

  • At least 90 percent of the proceeds from the SPAC's IPO and other concurrent sales of its equity securities will be held in a trust account controlled by an independent custodian until consummation of the SPAC's business combination
  • The SPAC's business combination must be with one or more operating businesses or assets with a fair market value equal to at least 80 percent of the net assets held in trust
  • The SPAC's business combination must be approved by a majority vote of the votes cast by public shareholders at a shareholders meeting
  • Each public shareholder voting against the SPAC's business combination will have a conversion right to convert its shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account (net of taxes, disbursed working capital expenses and deferred underwriting discount)
  • The SPAC cannot consummate a business combination if public shareholders owning in excess of a threshold amount (no higher than 40 percent) of the shares of common stock exercise their conversation rights
  • The SPAC will be liquidated if a business combination cannot be consummated within a specified time period not to exceed three years
  • In the event of liquidation, the SPAC's founding shareholders must waive their rights to participate in any liquidation distribution with respect to all shares of common stock owned prior to the IPO or purchased in any private placement in conjunction with the IPO. In addition, the IPO underwriters must waive their rights to any deferred underwriting discount deposited in the trust account.

The NYSE indicates that it does not intend to list every SPAC that meets the minimum requirements set forth above. Instead, it would exercise broad discretion and consider proposed SPAC listings on a case-by-case basis. Prior to the consummation of a business combination, the NYSE could suspend and delist the SPAC if it does not meet certain capitalization requirement and distribution criteria. After shareholders vote to approve a business combination, the NYSE would assess the continued listing of the SPAC and would have the discretion to suspend and delist the SPAC.5

Finally, the proposed rule change also contains a section emphasizing the NYSE's policy with regard to "back door listings" as outlined in Section 703.08(E) of the NYSE's Listed Company Manual (the "NYSE Manual"). In a back door listing, a listed company (in this instance, a SPAC) is acquired by an unlisted company. Typically in such a situation the unlisted company is the larger entity, and frequently the unlisted company will be treated as the acquiror for accounting purposes. The NYSE determines whether a business combination constitutes a back door listing by considering a number of factors. If a business combination is deemed to be a back door listing, the NYSE will delist the resulting company if it doesn't qualify for original listing. On the other hand, if a business combination is deemed not to be a back door listing, the resulting company only needs to meet the continued listing standards.

Impact

It is unlikely that the SEC or any other regulatory body would block these proposed rule changes, although most expect that it will take time for the SEC to clear the proposed rule changes and for companies to start listing on NASDAQ or the NYSE. Although some see the NYSE's proposed rule changes as an expected formality as it is in the processes of acquiring the Amex, it is foreseeable that the new NYSE will face competition from NASDAQ for the lucrative SPAC listings in a market looking for deals.

Footnotes

1 SPACs cannot satisfy alternative standards to list on either the NASDAQ Global Market under NASDAQ Rule 4420 or the NASDAQ Capital Market under NASDAQ Rule 4310(c) because those standards contain income and operating history requirements.

2 NASDAQ has discretionary authority under NASDAQ Rule 4300 to deny initial or continued listing to an issuer when an individual (typically an officer, director, substantial security holder or a consultant to the issuer) with a history of regulatory misconduct is associated with the issuer. In this regard, a SPAC is treated no differently from other types of issuers.

3 All of the NYSE's current quantitative listing standards require some period of operations prior to listing, which SPACs by definition do not have.

4 Unlike the NYSE's current quantitative listing standards, the proposed listing standard does not require SPACs to have prior operating history.

5 After consummation of its business combination, a SPAC will be subject to Sections 801 and 802.01 of the NYSE Manual, which pertain to the NYSE's authority to suspend or delist securities when a listed company falls below certain quantitative and qualitative continued listing criteria. With regard to the numerical criteria specifically, the NYSE has decided to apply the continued listing standard applicable to companies listed under the "Earnings Test" in Section 802.01B of the NYSE Manual to all post-business combination SPACs. In other words, to be considered in compliance with the numerical criteria, the average global market capitalization of a consecutive 30-trading-day period cannot be less than $75 million, and, at the same time, stockholders' equity cannot be less than $75 million. Notwithstanding the foregoing, Section 802.01B of the NYSE Manual provides that the NYSE will promptly initiate suspension and delisting procedures if a company is determined to have average global market capitalization over a consecutive 30-trading-day period of less than $25 million.

This article is presented for informational purposes only and is not intended to constitute legal advice.