Introduction

On 13 April 2021, Grab Holdings Inc. made headlines when it announced its intention to list on the Nasdaq Stock Market through its US$39.6 billion merger with Altimeter Growth Corp., a special purpose acquisition company (SPAC), in what is the largest SPAC merger to date. The deal reflects a larger trend towards SPAC listings and mergers, with the value of global SPAC deals this year standing at a record US$170 billion as at 9 March 2021, and already exceeding the total value of US$157 billion from last year. The South Morning China Post has further reported that some of Southeast Asia’s biggest technology companies are looking to go public by merging with US-listed SPACs, leaving Asian bourses with some introspection to do. On 31 March 2021, the Singapore Exchange (SGX) issued a consultation paper in relation to a proposed regulatory framework for the listing of SPACs on its Mainboard (SGX Consultation Paper) to seek market feedback for its proposals. The consultation remains open until 28 April 2021.

The SPAC and its benefits…

SPACs, or blank cheque companies, are shell companies formed by a group of experienced investors (or sponsors) to raise funds through an initial public offering (IPO), for the sole purpose of merging with or acquiring an existing private company or its business (Target). Shareholders who invest in the SPAC at the IPO are issued its shares (with an option to have those shares redeemed) and warrants, and do so in reliance on the expertise and proven track record of the sponsors and the SPAC’s management team. The majority of the funds raised from the IPO are held in an escrow account.

After the fund-raising, the sponsors are given a set timeframe (typically within two (2) years of the IPO) to acquire or merge with the Target and take it public (also known as a “business combination”). The acquisition or merger will be funded by the proceeds raised from the IPO, and is subject to shareholders’ approval. In return for the business combination, the sponsor receives a “promote” in the form of shares (typically amounting to a 20% stake) in the combined entity (or “resulting issuer”) for a nominal sum. If no suitable deal is secured within the set timeframe, the funds in the escrow account are returned to the shareholders.

The benefits of a listing by way of a business combination for the Target include:

• SPAC mergers are typically faster and cheaper, and allows for greater deal flexibility than traditional IPOs;
• the SPAC merger process offers better market and price certainty, where the uncertainties in raising public capital and the final offering price from the book-building process in a traditional IPO are eliminated through direct negotiations between the SPAC and the Target; and
• following the business combination, the Target could gain a strategic partnership with the sponsors, who may offer experienced leadership and/or strategic guidance.

In relation to the SPAC, a SPAC IPO is also relatively simpler and quicker than a traditional IPO, given that the SPAC has no operational history, business operations or assets. Consequently, a SPAC IPO requires less professional due diligence work and prospectus disclosures in relation to past and/or ongoing business operations. The lengthier traditional IPO roadshow process, which entails a higher level of investors’ scrutiny on the company’s operating business, is also not required in the case of a SPAC IPO.

… and its consequent risks

Despite these benefits, the SPAC listing and merger process is not without its risks. First, the shareholders which remain in the resulting issuer may be subject to significant dilution. Shareholders may, following the business combination, exercise the warrants issued to them at the IPO for new shares in the resulting issuer. They can also redeem their shares for cash even if they had voted in favour of the business combination. By exercising their warrants, they keep equity for the upside despite not having contributed economically to the business combination. The US Securities and Exchange Commission has put a dampener on the SPAC party by issuing new guidance that warrants, which are issued to early investors, might not be considered equity instruments and may instead be liabilities for accounting purposes.

Separately, as a Target would not have been identified at the time of the IPO, investors may only rely on the track record of the sponsor to decide whether to invest in the SPAC. There is also the risk that shareholders’ approval for the business combination may not be obtained, as well as execution risks, such as the inability to identify a suitable Target or successfully completing the business combination within the set timeframe.

Finally, with the rush to complete the business combination, the sponsors may settle for less ideal Targets or agree to terms which are less favourable to shareholders.

Proposals under the SGX Consultation Paper

To mitigate some of the risks set out above and safeguard the interests of investors, while meeting the capital-raising needs of the market, the SGX has proposed, amongst other things, the following requirements in relation to SPACs, highlights of which are summarised below.

Additional Admission Criteria

• Market capitalisation: The SPAC must have a minimum market capitalisation of S$300 million, computed based on the IPO issue price and post-invitation issued share capital.
• Public float: At least 25% of the total number of issued shares of the SPAC must be held by at least 500 public shareholders at IPO.
• Issue price: The shares of the SPAC must have a minimum issue price of S$10 per share (as opposed to the existing minimum issue price of S$0.50 for securities offered for a Mainboard listing).
• Jurisdiction of incorporation: The SPAC must be incorporated in Singapore.
• Dual class share structure: The SPAC will not be permitted to adopt a dual class share structure for its IPO.

Business Combination Requirements

• Timeframe for business combination: The business combination must, barring exceptional circumstances, be completed within a maximum time frame of 36 months from the date of listing.
• Escrow account: At least 90% of the IPO proceeds must be placed in escrow pending the business combination, with such proceeds returned on a pro rata basis to shareholders voting against the business combination or upon the liquidation of the SPAC.
• Fair market value of Target relative to amount in escrow account: The business combination must comprise an initial acquisition of a Target with a fair market value forming at least 80% of the amount held in the escrow account.
• Approvals for business combination: The business combination requires the approval of (a) a simple majority of independent directors, and (b) independent shareholders by ordinary resolution.
• Appointment of financial adviser and independent valuer: The SPAC is required to appoint a financial adviser who is an issue manager to advise on the business combination. The SPAC would also have to appoint an independent valuer to value the Target.
• Disclosures in the circular to shareholders on the business combination (Circular): The Circular for the approval of the business combination must contain prospectus-level disclosures on key areas, including (a) financial position and operating control, (b) character and integrity of the incoming directors and management, and (c) material licences, permits and approvals required to operate the business.
• Initial listing requirements: The resulting issuer following the business combination must meet initial Mainboard listing requirements.

Conditions on the Founding Shareholders, Management Team and Controlling Shareholders

• Minimum equity participation: The founding shareholders and/or the management team must subscribe to a minimum aggregate value of shares in the SPAC, the value of which will be based on the market capitalisation of the SPAC at IPO. For example, where the SPAC’s market capitalisation is between S$300 and S$500 million, this minimum aggregate value is S$10 million. Consequently, they would hold a minimum of 1.5% to 3.3% of the shares.
• Moratorium: The key parties (including the founding shareholders, management team, controlling shareholders and their respective associates) are required to observe a moratorium on the transfer or disposal of their shareholding interests, between the SPAC IPO and the business combination, and within six (6) months following the business combination.

Investor Protection Safeguards

• Redemption rights: Only independent shareholders who vote against the business combination will be afforded the right to redeem their ordinary shares.
• Right to liquidation distribution: The SPAC will be liquidated if (a) it fails to complete a business combination within the set timeframe, or (b) a material change in the profile of the founding shareholders and/or management team critical to the successful founding of the SPAC and/or completion of the business combination occurs prior to its consummation, unless independent shareholders approve by special resolution the continued listing of the SPAC. Upon liquidation of the SPAC, the funds in the escrow account will be distributed to all independent shareholders on a pro rata basis, and to the founding shareholders, management team and their respective associates in respect of their shares purchased after the SPAC’s IPO.
• Non-detachability of warrants: Any warrants (or other convertible securities) issued with the ordinary share of the SPAC at IPO must be non-detachable from the underlying ordinary shares for trading on the SGX.

Conclusion

The proposals under the SGX Consultation Paper addresses the concerns of SPAC listings and mergers by protecting the interests of investors and ensuring the quality of the SPACs, its sponsors and potential Targets. It remains to be seen if these proposed rules instead work to curtail some of the advantages which make SPACs attractive in the first place. Observers have commented that these rules may also limit potential Targets from undergoing business combinations as they do not fulfil the Mainboard requirements (in particular, the relatively high S$300 million market capitalisation, the S$10 minimum issue price and the condition for founders to maintain skin-in-the-game by subscribing for a minimum value (being at least S$10 million) of the IPO). The jury is still out as to whether the proposed SGX regime strikes the right balance of being sufficiently robust whilst remaining attractive to SPACs and their sponsors.