Previously perceived as a liquidity and financing vehicle, Special Purpose Acquisition Companies (“SPACs”) are now dominantly being used for rapid listing on stock exchanges.
The SPAC Evolution
The issues associated with the traditional IPO listing and the burden of regulatory paperwork have diverted attention to SPACs which boast a quick and efficient route to go public.
Historically, investors and founders were sceptical of SPACs due to their poor financial performance. However, with excess capital in hand, the tide has turned, and SPACs are becoming an important component of the capital markets landscape.
In recent years, many well-known investors including hedge funds and private equity fund managers have joined the SPAC race. They have brought expertise and credibility to SPAC, cementing its position, not just as the hottest investment vehicle, but also a reputable one.
The SPAC Timeline: how long does it take?
Typically, a SPAC has a two-year window to search and acquire a target company. After a target company is identified, shareholders vote and choose to either merge with the target company, search for new target company, or liquidate the SPAC. Once shareholder approval for target company is received, the SPAC merges with the target company, this process is called De-SPACing.
A SPAC formation involves an experienced management team or sponsor who pays a nominal amount for generally, a 20% ownership of the SPAC share stake. This is often known as the founders’ shares, which reward the initial investors for funding the capital and identifying a promising target. The sponsor may also be expected to loan additional funds if the SPAC requires additional capital to pursue the business combination or pay other expenses.
After formation, the SPAC then raises capital by issuing units for the remaining 80% interest through a public offering. Each unit consists of a common share and a fraction of a warrant. Founder stocks and public shares generally have similar voting rights with few exceptions, namely only sponsors with founder stocks can select the SPAC directors. Institutional investors and warrant holders typically do not have the same voting rights as only whole warrants are exercisable. At least 90% of the IPO proceeds are held in a trust or escrow account until a target company is acquired. The account must be opened with and operated by an independent escrow agent which is part of a financial institution licensed and approved by the Monetary Authority of Singapore. The funds can be released for the redemption of public shares if the SPAC is unable to complete a business combination.
Target search and identification
Under the Singapore Exchange (SGX) framework announced on 2 September 2021, a SPAC in Singapore has 24 months to identify and complete a de-SPAC transaction. An extension of 12 months may be considered under prescribed conditions. Similar to any M&A transaction, the SPAC must undertake the necessary due diligence to assess a target company and its value. Then, it must issue a circular to shareholders to inform them of the potential business combination as well as a valuation report which includes audited historical financial statements.
Following the identification of the target company, the SPAC will undertake a mandatory shareholder vote. The SPAC needs to provide sufficient time to ensure an active solicitation period and an informed shareholder vote. The business combination must be respectively approved by a simple majority of directors and by a resolution passed by shareholders.
When the conditions in the agreement are satisfied, the merger will be consummated in the De-SPAC transaction. Subsequently, the SPAC and the target business will combine into a publicly traded operating company. The sponsor’s founders’ shares and warrants will be under a lock-up period for one year after the closing of the De-SPAC transaction, but it is subject to an early termination. The SPAC would also be subject to continuing listing obligations under the SGX listing manual.
Below are the requirements that need to be met prior to a De-SPAC completion:
The initial business combination must have a fair market value of at least 80% of the escrowed funds.
The De-SPAC must result in the resulting issuer having an identifiable core business of which it has majority ownership or management control.
The SPAC is required to appoint a financial adviser who is an issue manager to advise on the business combination, subject to the oversight by regulators in Singapore.
The Issuer must commission an independent valuation of the target business where (i) there is no private investment in a public entity (PIPE) investment or (ii) the businesses or assets to be acquired under the business combination involves a mineral, oil and gas company, or property investment/development company. The valuation report must be included in the shareholders' circular seeking approval for the De-SPAC transaction.
The shareholders’ circular seeking approval for the business combination must comply with the prospectus disclosure requirements.
How can we help?
With the inclusion of seasoned auditors, IFRS experts, capital market, tax and transaction specialists, Mazars in Singapore provide exceptional services and deep insights on SPACs. We offer the following services:
Audit of prospectus for listing purposes
Audit of consolidated financial statements
Issuance of comfort letters and bring-down letters
Valuation of complex warrants usually issued in SPAC transactions
Provide with IFRS expertise on the accounting treatment of securities issued in SPACs
Financial & Tax Due Diligence on the Target Company to achieve the De-SPAC
Tax Advisory & Structuring throughout the SPAC process
For further information, please get in touch with us today.
Pierre-Paul Jacquet Partner, Head of Financial Advisory - Singapore