Singapore: SGX Consults On Proposed Listing Framework For Special Purpose Acquisition Companies

On 31 March 2021, the Singapore Exchange Securities Trading Limited ("SGX") issued a consultation paper inviting public comments on a proposed regulatory framework for the listing of Special Purpose Acquisition Companies ("SPACs") on its Mainboard ("Consultation Paper").

The Consultation Paper seeks feedback, views and suggestions on SGX's proposed regulatory framework, which aims to provide a balanced regime that effectively safeguard investors' interests while meeting the capital needs of the market.

1. Background

SPACs, commonly known as "blank cheque companies", are companies with no prior operating history, operating or revenue generating business or asset at the point of its initial public offering ("IPO"). They are formed to raise capital through an IPO for the sole purpose of acquiring an existing company through a business combination. Following the IPO, the capital raised are placed into an escrow account and if the SPAC does not complete a business combination within the requisite time frame, the SPAC will be liquidated and the IPO proceeds will be returned to shareholders. SPACs are typically established and managed by an experienced management team, who is given a period of between 24 and 36 months to identify, undertake and complete a business combination with a target company, also known as de-SPACing.

The United States (Nasdaq Stock Market ("Nasdaq") and New York Stock Exchange ("NYSE")) currently account for majority of the listing of SPACs, with several other stock exchanges, including, but not limited to, the Toronto Stock Exchange, Bursa Malaysia, London Stock Exchange and Korea Exchange permitting SPACs to be listed. In recent times, multiple high-profile businesses have decided to go public via a SPAC instead of a traditional IPO, such as Virgin Galactic Holdings, Inc., Restaurant Brands International Inc., Opendoor Technologies Inc. and the recently announced Grab Holdings Inc..

2. Historical SPAC vs Traditional IPO

a. Listing Timeline

Depending on the complexity of the group structure and business of the issuer, an IPO may take in excess of 12 months to be completed. Conversely, for SPACs listed on Nasdaq and the NYSE, upon identification of a target company to be acquired, the de-SPACing process typically takes between 3 – 5 months to be completed. SPACs therefore offer businesses an attractive option to be listed quickly. The Consultation Paper is silent as to the processing time.

b. Valuation and Funds to be Raised

In an IPO, a company will typically undergo a book building process to determine a price range its securities may be sold for. As such, the valuation of the company and amount of funds that will be raised through the IPO will largely depend on the market's demand for the company's securities as well as market sentiment. Listing through a SPAC differs in that the valuation of the target company and the funds that will be raised through the business combination will be privately agreed between the management team of the SPAC and the target company, providing certainty to the success of the listing exercise.

c. Listing Requirements

As part of the listing requirements, a company seeking to be listed on the Mainboard of the SGX through a traditional IPO must satisfy 1 of the 3 requirements:

a. Minimum consolidated pre-tax profit of not less than S$30 million for the latest financial year and an operating track record of at least 3 years;

b. Profitable in the latest financial year, an operating track record of at least 3 years and a market capitalisation of not less than S$150 million; or

c. Operating revenue in the latest completed financial year and a market capitalisation of not less than S$300 million.

On the other hand, the resulting issuer post-business combination will not be subject to such listing requirements, providing an attractive alternative for companies that are unable to meet the market capitalisation requirements, have thin or no profits and/or does not have an operating track record of 3 years to be listed on SGX.

d. Management Team

SPACs are typically formed and headed by a group of dedicated, experienced and professional management team. Depending on the agreed terms of the business combination, members of the SPAC's management team may be appointed to the management team of the resulting issuer, thereby providing the resulting issuer a vast amount of knowledge and expertise at its disposal. In contrast, in a traditional IPO, the management team of the issuer may suffer from a lack of capital market experience, especially when the newly formed management team do not have prior experience or the know-how to run and manage a publicly traded company.

3. Proposed Admission and Related Criteria

a. Admission Criteria

SGX has proposed SPACs seeking a primary listing on its Mainboard to be subject to the following additional admission criteria:

1. Minimum Market Capitalisation – A SPAC must have a minimum market capitalisation of S$300 million.
2. Public Float – At least 25% of the SPAC's total number of issued shares must be held by at least 500 public shareholders at the date of listing of the SPAC.
3. Minimum Issue Price – A minimum issue price of S$10 per share or unit.
4. Jurisdiction of Incorporation – A SPAC must be incorporated in Singapore.
5. Dual Class Share Structure – A SPAC will not be permitted to adopt a dual class share structure.

b. Suitability Assessment Factors of a SPAC

In addition, to assess the suitability of a SPAC for listing on SGX, SGX will consider the following suitability assessment factors:

1. The profile including the track record and repute of the founding shareholders and experience and expertise of the management team of the SPAC;
2. The nature and extent of the management team's compensation;
3. The extent of the founding shareholders and the management team's equity ownership in the SPAC;
4. The alignment of interests of founding shareholders and the management team with the interests of other shareholders;
5. The amount of time permitted for completion of the business combination prior to the liquidation distribution;
6. The dilutive features of the SPAC, including those which may impact shareholders and whether there are any mitigants for such dilution;
7. The percentage of amount to be held in the escrow account that must be represented by the fair market value of the business combination; and
8. Such other factors that SGX believes are consistent with the aims of protecting investors and promoting public interest.

The above suitability assessment factors are not meant to be exhaustive and SGX retains the discretion to consider any other factors that are deemed relevant in its assessment on the suitability of a SPAC for listing on SGX.

4. Proposed Business Combination Requirements

In seeking a balanced regime that effectively safeguard the interests of investors while meeting the capital needs of the market, SGX has proposed the following business combination requirements:

Permitted Time Frame for Completion of Business Combination

A SPAC must complete a business combination within a maximum time frame of 36 months from the date of its listing. The founding shareholders may voluntarily indicate a shorter time frame to complete the business combination in the SPAC's constitution. An extension of time may be permitted under exceptional circumstances, which will require a special resolution to be passed by shareholders, excluding founding shareholders, the management team and their associates ("Independent Shareholders").

Minimum Percentage of IPO Proceeds Held in an Escrow Account

At least 90% of the gross proceeds from the SPAC's IPO must be placed in an escrow account to ensure a majority of the cash assets of the SPAC is safeguarded until the completion of a business combination. Only in specified circumstances may the funds placed in the escrow account, interest earned and income derived from such funds be drawn prior to the completion of a business combination.

Fair Market Value of the Target Company Relative to the Amount in Escrow Account

The business combination 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, based on the fair market value and the amount in the escrow account at the time of entry into the binding agreement for the business combination. A competent and independent valuer shall be appointed to value the business(es) or asset(s) to be acquired under the business combination and the independent valuation report is to be appended to the circular to shareholders seeking their approval for the business combination.

Minimum Equity Participation

The founding shareholders and the management team will be subject to a minimum aggregate subscription value to align their economic interest in the SPAC with that of other shareholders. The minimum aggregate subscription value will depend on the market capitalisation of the SPAC as illustrated in the below table:

Period of Moratorium

It is proposed that the following parties observe a moratorium on transfer of all or part of their direct and indirect shareholding interest held in the SPAC:

(a) Founding shareholders, the management team, the controlling shareholders and their respective associates – Date of SPAC's listing until at least 6 months from the date of completion of the business combination; and

(b) Executive directors of the resulting issuer with an interest in 5% or more of the issued share capital of the resulting issuer – At least 6 months from the date of completion of the business combination.

Approval of Business Combination

The business combination will be required to be approved by (a) a simple majority of the SPAC's independent directors and (b) by ordinary resolution passed by Independent Shareholders. Excluding the founding shareholders, the management team and their respective associates from voting on the business combination ensures that the SPAC strives to complete the most desirable business combination available, the business combination is conducted on an arm's length basis and is not prejudicial to the interests of the SPAC and the Independent Shareholders.

Liquidation of the SPAC

In the event the SPAC fails to (a) complete a business combination within the permitted period; or (b) there is a material change in relation to the profile of the founding shareholders and/or the management team critical to the successful founding of the SPAC and/or successful completion of the business combination and specific Independent Shareholders' approval is not obtained, the SPAC will be liquidated.

The remaining funds in the escrow account will be returned and distributed in cash to (a) 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 (b) the founding shareholders, the management team and their respective associates in respect of shares purchased after the SPAC's IPO.

5. Proposed Safeguards Against Dilution

Taking into consideration the regulatory framework and practices of other jurisdictions, SGX has proposed implementing the following safeguards to prevent excessive dilution of the remaining shareholders of the resulting issuer post-completion of the business combination:

Redemption and Liquidation Distribution Rights of Shareholders

It is proposed that only Independent Shareholders who vote against the business combination will be afforded the right to elect to redeem their ordinary shares and receive a pro rata portion of the amount held in the escrow account in cash ("Redemption Right"), in the event the business combination is approved and completed within the permitted time frame. Independent Shareholders that did not participate in the vote or have voted for the business combination will not be afforded a Redemption Right. This measure aims to mitigate against concerns of high redemption rates at the vote for the business combination, resulting in further dilution to remaining shareholders of the resulting issuer due to additional financing required to complete the business combination.

Issuance of Convertible Securities

In view of the possible dilutive effect involving conversion of accompanying warrants or other convertible securities (if any) post-business combination, it is proposed for warrants or other convertible securities, which may be issued together with the ordinary shares of the SPAC at IPO, to be attached to the underlying ordinary shares and traded as a single unit on SGX. Upon exercise of the Redemption Right by Independent Shareholders who have voted against the business combination, the warrants or other convertible securities (if any) shall be nullified and void. An alternative is to require the SPAC to impose a maximum percentage cap on the resultant dilutive impact to shareholders post-business combination arising specifically from the conversion of the accompanying warrants or other convertible securities (if any).

6. Observations

1. As the funds raised through a SPAC listing is placed in an escrow account, the choice of the escrow agent and the controls over the escrow arrangement comes into scrutiny. The credentials of the escrow agent and details of the escrow arrangement should be fully disclosed and periodic announcements should be made on the use of proceeds.

2. As the issue price for each share in a SPAC listing is a minimum of S$10, it is a possible scenario that such structures may attract more institutional investors over retail investors.

3. SPACs listings will potentially provide the listed company with a stronger warchest and a reasonable time frame to seek out, conduct proper due diligence and acquire higher quality business(es) and asset(s), with a view to enhancing shareholder value.

4. With sufficient safeguards, proper disclosure and regulatory tools, the proposed implementation of SPACs listing by SGX will be a step in the right direction to enhance our position as an international financial centre.

7. Closing Date of Consultation

The consultation closes on 28 April 2021 and a copy of the SGX consultation paper can be obtained here.

The Client Update was prepared by Gwendolyn Gn (Partner), Joel Tan (Partner) and Eric Kwok (Practice Trainee).

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.