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SGX's proposals on SPAC listings set tone for a more sustainable scheme

SGX's proposals on SPAC listings set tone for a more sustainable scheme

Source: Business Times
Article Date: 08 Apr 2021
Author: Raphael Lim

Proposed rules show bourse has paid close attention to criticisms of structure; set its expectations.

The Singapore Exchange (SGX) has launched its consultation on special purpose acquisition companies (SPACs), and it shows that the bourse has paid close attention to the criticisms of the structure.

With proposed rules such as minimum market capitalisation, limiting redemptions to dissenting shareholders, as well as minimum sponsor equity participation and shareholding moratorium, the bourse has set the tone on what it expects.

Investors should cheer the better alignment of interests, even if the proposed structure raises the stakes for any sponsor planning on listing SPACs in Singapore.

After all, scrutiny on SPACs is rising in the US - where around 500 SPACs have raised about US$170 billion over the last 12 months.

The US Securities and Exchange Commission published an investor alert last month warning against investing in SPACs on the basis of celebrity involvement, and highlighted the differing economic interests of sponsors and investors.

There are also reports that the US regulator is making inquiries on the structure, with SPAC listings also starting to slow in recent weeks.

Against this backdrop, SGX's proposals can be seen as taking the lead in identifying ways for the structure to be improved. This may set the stage for a more sustainable future for SPACs.

Sustainable trend

Stricter rules would mean fewer sponsors, but this is not necessarily a bad thing.

Market participants have already questioned the sustainability of the current pace of issuances in the US, and having rules that filter for the genuine candidates can be beneficial.

SGX needs quality growth or tech players to provide diversification in a market dominated by old economy stocks.

SPACs allow for negotiations between a target and a sponsor, helping to value business models with few comparables in the market. It can be thought of as an alternative to traditional initial public offerings (IPO) - meant for business models with a difficult story to convey that are not well-suited to the book building process.

If the early SPACs manage to do this well, investors will become more familiar with tech or growth stocks and such companies may even be able to list via a normal IPO in future.

SPACs should not be a backdoor for companies that aren't ready for public markets, and the proposed rules go some way to reduce such risks.

For instance, SGX wants sponsors to have a minimum equity share and a moratorium on their shareholding interest.

It also wants to prevent independent investors from redeeming their capital in SPACs if they vote for a transaction to proceed. This is distinct from the US, where investors can vote for a transaction to proceed but then pull out their capital while retaining a free warrant for potential upside.

Both these measures would encourage sponsors to bring forward only quality targets with sustainable businesses. Anything else would likely result in a rejection, and potential losses.

It also encourages long-term genuine investors to enter at a SPAC's IPO, rather than those who simply want to capitalise on an opportunity at the expense of diluting others.

And for the long run, it is this more sustainable approach that SGX needs.

While it is possible that market forces and investor discipline could have done the same, the situation in the US - where even those with no obvious relevant experience are raising SPACs - does not suggest that rational behaviour would prevail.

Considering that most Singapore retail investors are less familiar with tech or growth investments, having the guardrails of a credible sponsor with regulations pushing for aligned interests is even more important.

Striking a balance

There are risks to this approach, chiefly that Singapore's SPAC framework could see minimal participation.

The proposals are a step in the right direction, but SGX must also ensure that the rules will not be deal-breakers for the quality sponsors. Already, market participants have said that the minimum market capitalisation of S$300 million is too steep.

And given the depth and breadth of the US market, it might be an uphill climb for SGX to attract SPAC listings with a stricter regime.

SGX must, therefore, take the time to analyse the feedback from the consultation and identify any deal-breakers in its proposals that must be tweaked so that it finds a workable solution that can still attract quality sponsors.

It should not be investor protection at all costs - investors too must be responsible and study the pros and cons of SPACs, if they want to invest in them.

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

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