Great ExSPACtations

By Stefanie Yuen Thio

The advent of blank cheque company IPOs.

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 (IPO) to invest in potential but as yet unidentified target businesses, have fuelled a listing frenzy in the US. SPAC IPOs have garnered US$87.9 billion in fundraising in the first three months of 2021, already exceeding last year’s total. Wework, recovering from a failed 2019 IPO, has just announced that it is going public via a SPAC deal valuing it at US$9 billion. In breaking news, Singapore’s ride hailing app Grab has announced a SPAC merger in the US valuing it at US$35 billion.

Asia is the new focus, with potential targets, private equity players and investment banks clamouring for a similar framework. On the back of this excitement, the SGX-ST 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 (ex-Japan) and its largest bond marketplace – but our non-REIT equities continue to flounder. The SGX-ST needs to reinvent for the future, a future where national stock exchanges may no longer be relevant. After all, increasingly global markets give investors the ability to trade outside domestic exchanges. The investment landscape of tomorrow may only have a few key exchanges, each specialising in specific investments. Already, technology listings flock to NYSE and NASDAQ, and the SGX-ST is seen as a yield play and derivatives trading hub. Losing home grown success stories like Grab to the US exchanges adds an impetus to the SGX-ST’s initiative.

SPACs are not rose-tinted

SPACs raise money from the public at IPO, intended for the acquisition of a target business to be identified in the future, usually within a two-year time frame. When a target is identified, the SPAC goes to shareholders to approve the acquisition and, if approved, will merge the target business into the SPAC (called the “De-SPAC”). Otherwise the money is returned. Shareholders may vote for or against the merger. They also have the option, at this point, to require that the SPAC redeem the shares issued at IPO with interest, getting their money back.

The commercial structuring of SPACs has 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 the De-SPAC comes up for approval, shareholders voting in favour of the merger can still, counterintuitively, require their shares to be redeemed, yielding an attractive return. This leaves the funding of the De-SPAC to the other shareholders. Research shows that in most SPACs, a majority of the IPO investors exited by redemption prior to the merger, without participating in the objective for which the SPAC was formed in the first place. Shareholders who redeemed can hold on to, and monetise, their warrants – effectively an added bonus. This, plus the attractive “promote” fees of 20 per cent of the SPAC that the sponsor gets, also for free, 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 so there is considerable pressure on the part of the sponsor to identify a target and complete the merger, possibly on terms which 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-ST will be to attract this calibre of players.

These, and other, issues are addressed front and centre by the SGX-ST in its consultation paper. It has proposed certain fixes such as not allowing warrants to be detached from the shares, and not permitting a SPAC shareholder who votes in favour of the De-SPAC to redeem its shares. 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. However, having a listing framework that requires significant deviation from the terms of US-style SPACs, features which 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, the SGX-ST needs to keep up with investment trends. In this, its ability to on-board innovative products quickly is its key differentiator. Since Capitaland struck the listing-day gong on our first REIT, we have become Asia’s largest REIT platform (ex-Japan). Hong Kong, despite multiple efforts to grow this segment, has lagged with only 12 REITs, which account for a paltry one per cent of the HKEX’s total market capitalisation. Singapore 42’s listed REITs make up 12 per cent of SGX-ST’s market capitalisation. Much of this success is due to our ability to nimbly adopt an effective REIT listing framework, and be 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 UK, trying to break out of a post-Brexit funk, is aggressively looking at amending its rules for SPACs which currently require trading in SPAC shares to be suspended while the De-SPAC is underway, anathema to markets that need up-to-the-minute trading freedom as their oxygen. 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 paper, 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-ST SPAC listings, this will in turn attract top businesses and institutional investors, raising the level of corporate scrutiny and the bar on governance, which may be just as effective in policing listed companies as a slew of listing rules.

A version of this article was published in The Business Times on 1 April 2021.



TSMP law corporation