Great exSPACtations - the advent of blank-cheque companies in Singapore
In formulating a Singapore framework for SPACs, the lessons from other markets are instructive.
Special Purpose Acquisition Companies (SPACs) have taken the corporate world by storm. These blank-cheque shell companies, which raise funds in their initial public offerings (IPOs) to invest in potential but as yet unidentified target businesses, have fuelled a listing frenzy in the United States. SPAC IPOs have garnered US$87.9 billion in fundraising in the first three months of 2021, already exceeding last year's total.
Now, the focus has shifted to Asia - with potential targets, private equity players and investment banks clamouring for a similar framework. On the back of this excitement, the Singapore Exchange (SGX) has issued a consultation paper with a view to introducing SPAC listings by the end of the year, in the race to be the premier Asian venue for such IPOs.
While local markets clearly would like to replicate the US's success in Asia, another important motivator arises from continued arctic Sino-US relations: Chinese companies and Chinese money are looking for a neutral listing platform.
Singapore has no choice but to jump on the bandwagon. Our stock exchange may continue to thrive in the real estate investment trust (Reit), derivatives and fixed income sectors - we are Asia's biggest Reit market outside Japan, and its largest bond marketplace - but our non-Reit equities continue to flounder. The SGX needs to reinvent for the future - a future in which national stock exchanges may no longer be relevant. Investors increasingly trade their outside domestic exchanges. The investment landscape of tomorrow may have but a few key and specialised exchanges. Already, technology listings flock to the New York Stock Exchange and the Nasdaq, and SGX is seen as a yield play and derivatives trading hub.
Not all rosy
The commercial structuring of SPACs does, however, have a number of disadvantages, which have been the subject of much criticism. I highlight three concerns.
First, value dilution. Shareholders who invest in the SPAC at IPO are issued warrants along with shares. When a SPAC seeks shareholder approval to merge with a business - the so-called de-SPAC - shareholders voting in favour of the merger can still, counterintuitively, redeem their shares in the SPAC for cash. This leaves the funding of the merged SPAC to the other shareholders. Research shows that in most SPACs, a majority of the IPO investors exited by redemption prior to the merger. Shareholders who redeemed can hold on to, and monetise, their warrants - effectively a bonus. This, plus the attractive "promote" fees of 20 per cent of the SPAC that the sponsor gets, usually for a nominal sum, create significant dilution risk to SPAC shareholders coming in post-IPO.
Second, misalignment of interests. A SPAC sponsor has to stump up the cash to pay for the IPO expenses. These costs will be lost if the de-SPAC does not go ahead within the usual two-year period. There is therefore considerable pressure on the part of the sponsor to identify a target and complete the merger, possibly on terms that are not that favourable to SPAC shareholders.
Third, investor protection. Caveat emptor is a key tenet of public fundraising. Transparency and completeness of disclosure of the target business are immutable laws for the prospectus upon which an IPO is marketed to the retail public. In a SPAC, investors can only rely on the business track record of the sponsor, as no target would have been identified. In the US, the successful sponsors have been large private equity funds and former senior management teams of Fortune 500 companies. A key challenge for the SGX will be to attract this calibre of players.
These and other issues are addressed front and centre by the SGX in its consultation paper. It has proposed certain fixes such as not allowing warrants to be detached from the shares, and not permitting redemptions for a SPAC shareholder who votes in favour of a de-SPAC. It has also set a minimum bar for the disclosure and eligibility requirements of the merger target, which must be voted for by independent shareholders, and proposed guidelines on the quality of the SPAC sponsors. The concerns highlighted by the consultation paper are valid. But having a listing framework that requires significant deviation from the terms of US-style SPACs, features the market expects and has priced into the SPAC, may make a Singapore SPAC less attractive to an investor at IPO and deter the most established sponsors from listing their SPACs here.
Singapore's SPAC-tacular opportunity
To remain relevant and competitive SGX needs to keep up with investment trends. In this, its ability to on-board innovative products quickly is its key differentiator. Much of Singapore's success with Reits, for instance, can be attributed to SGX's nimble adoption of an effective Reit listing framework as well as it being first-to-market.
In formulating a Singapore framework for SPACs, the lessons from other markets are instructive. Not all markets have been able to emulate US success. Europe has made a poor showing, with a mere three IPOs last year and US$495 million raised in total. The United Kingdom, trying to break out of a post-Brexit funk, is aggressively looking at amending rules that currently require trading in SPAC shares to be suspended while the de-SPAC is underway. This is anathema to markets that need up-to-the-minute trading freedom. The UK has also missed out on the gold rush: Last year British SPACs raised a meagre US$41.4 million.
If Singapore tries too hard to cater to the clamouring of the different stakeholder groups and comes up with a SPAC framework that is a Frankenstein's monster of rules, that may not sell well to potential sponsors looking to us to be an Asian alternative for US-style SPACs.
Singapore's key strength lies in being a neutral market of international standing, an advantage that is magnified by the ongoing Sino-US stand-off and the uncertainty plaguing Hong Kong. The window to successfully launch SPACs and capture market share is a small one. Without pre-empting the results of the consultation, Singapore should try to adopt the US SPAC framework as completely as feasible so that we are seen as a real alternative for Chinese and Asian businesses wanting to list via a SPAC. With the survival of national stock exchanges in the balance, Singapore needs to position itself as the market in Asia that is open while the US sleeps, giving 24-hour trading coverage. Being open to US-style SPACs will go a long way to cementing our role as the Asian node in the global capital market.
A well-regulated and dynamic marketplace needs robust rules. But it also needs quality issuers and reputable market makers. Rather than tinker with the commercial terms of SPAC offerings, we should focus on attracting good issuers and sponsors. If large private equity funds sponsor SGX SPAC listings, this will in turn attract top businesses and institutional investors and raise the level of corporate scrutiny and governance. And such quality market players may be just as effective in policing listed companies as a slew of listing rules.
- The writer is joint managing partner at TSMP Law Corporation.
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.