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SGX launches consultation on SPACs, with proposals to minimise dilution and better align interest

SGX launches consultation on SPACs, with proposals to minimise dilution and better align interest

Source: Business Times
Article Date: 01 Apr 2021
Author: Raphael Lim

SGX Regulation is seeking feedback on a framework that would attempt to reduce some of the risks of excessive dilution for long-term investors, as well as the rush for sponsors to de-SPAC.

Singapore Exchange (SGX) has launched a consultation on Special Purpose Acquisition Companies (SPACs), with proposals to address some of the risks posed by the listing structure.

SGX Regulation (SGX RegCo) is seeking feedback on a framework that would attempt to reduce some of the risks of excessive dilution for long-term investors, as well as the rush for sponsors to de-SPAC.

"Ultimately, we want our SPACs to be credible listing vehicles that result in successful value-creating business combinations for their shareholders," said SGX RegCo chief executive Tan Boon Gin at a media briefing. "This will increase investor choice, and add depth and diversity to our market."

He noted that SGX has received feedback that Asian SPACs would be of interest to investors and sponsors as it would be in the same time zone as Asian targets that may be more familiar to investors here. "I think if everything goes well, we are targeting to introduce a framework by the middle of the year, but it all depends on the feedback," he added.

Also known as a blank-cheque company, a SPAC is a shell entity formed by a group of investors - known as sponsors - who raise capital from other investors via an initial public offering (IPO). The purpose is to acquire a target business within a set timeframe and take it public - also known as a business combination or de-SPAC. If a suitable deal is not found, investors can redeem their capital.

The fundraising structure surged in popularity on Wall Street over the past year. Mr Tan pointed to Refinitiv data in early March showing US SPACs raising US$64.2 billion in IPOs so far this year, accounting for 76 per cent of total equity raised in IPOs.

But concerns have also emerged, with the US Securities and Exchange Commission warning in March that investors and sponsors may have differing economic interests. The regulator has reportedly opened an inquiry into the listing scheme.

SGX is therefore seeking a "balanced regime" to safeguard investors' interests while meeting capital raising needs of the market.

It has proposed for Singapore SPACs to have a minimum market capitalisation of S$300 million, in line with mainboard rules, with a timeframe of three years to de-SPAC. At least 90 per cent of IPO proceeds will be placed in escrow pending acquisition of a target.

The higher market cap - above the US$50 million requirement in the US - serves to ensure a SPAC is backed by experienced and quality sponsors and/or management with proven track record and repute, SGX said, adding it would also facilitate consummation of a "quality and sizeable business combination".

Stefanie Yuen Thio, joint managing partner at TSMP Law Corporation, said a target should be a strong business given the inherent risk of investing in a shell company.

"You shouldn't list mom-and-pop shops via a SPAC," she noted. She added, however, that the minimum threshold implies an asset acquisition ticket size of more than S$1 billion, which is ambitious. "This may be too high a hurdle especially for a fledgling market trying to break into SPACs."

SGX also intends to limit capital redemption rights at de-SPAC to independent shareholders who voted against the business combination, as "it is reasonable for shareholders to align their interests with and stand by their voting decisions".

Investors in the US can redeem their shares and get their money back - regardless of how they vote on a business combination - while retaining warrants in the SPAC.

Mr Tan said this could result in free-riding. Investors might redeem their shares but exercise their warrants when the stock outperforms, diluting long-term shareholders.

The bourse is also considering making warrants undetachable from shares, so that they are nullified when a share is redeemed. Alternatively, it is considering a cap on the dilutive effect of the warrant.

Limiting redemptions to dissenting shareholders would also encourage responsible voting and mitigate a rush to de-SPAC, Mr Tan said.

To align the interests of sponsors and independent shareholders, SGX has proposed that only independent shareholders and directors be allowed to vote on business combinations - with a simple majority required - so sponsors cannot force deals through.

The bourse intends to require a minimum equity participation by sponsors of between 1.5 and 3.3 per cent, depending on the SPAC's market capitalisation. It is also proposing a moratorium on shareholding interests held by key parties at various junctures.

Tham Tuck Seng, capital markets leader at PwC Singapore, said the moratorium would ensure sponsors do not just do an acquisition and disappear. “They must also take responsibility to ensure that the acquired business is sustainable.”

Some of the existing listing requirements will also be implemented for SPACs, although Mr Tan emphasised that the de-SPAC process would not be a "full-blown IPO process".

For instance, any de-SPAC will require "prospectus-level disclosures" on the business being acquired. A shareholders' circular, with information such as financial position and company management, must be submitted to SGX for review. And issuers that do not meet listing requirements under mainboard rules will be delisted.

The exchange is also proposing that a financial adviser, who is an accredited issue manager, be appointed to advise on the de-SPAC, and an independent valuer should also value the target company.

Mak Yuen Teen, associate professor of accounting at National University of Singapore, said SGX has thought through the risks and understands it cannot simply transplant the US SPAC model to Singapore, given the different institutional environment and weaker investor protection here.

"One would expect what remains will be the better candidates since those who shy away from the safeguards are probably those best avoided," he said.

Another issue would be the implementation and enforcement of the safeguards, Prof Mak added. "I have seen too many cases of questionable due diligence of companies that have gone through IPO and therefore have my doubts about the standard of due diligence we will see for SPACs."

Michael Lints, partner at venture capital firm Golden Gate Ventures, said some of the proposals by SGX make sense - such as giving sponsors three years to find quality targets. But he said some flexibility should also be considered in respect of market capitalisation, particularly if the exchange wants to be competitive when looking at tech companies.

There is some risk that the tougher regulatory regime will deter SPAC listings here. TSMP's Ms Yuen Thio said: "My concern is that tinkering with the terms will make the SPAC framework less attractive for market players who are used to and have priced in US-style SPACs."

But Mr Tan noted recent SPACs in the US are already trying to address risks with commercially negotiated terms. "In terms of the direction of travel, we can see that the market discipline in the US market is already kicking in," he said. "We think that whatever it is that we are proposing will actually be in line with these trends."

The consultation will be open until April 28, and the public can provide feedback to SGX.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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