Background: SPACs are shell companies formed to raise capital in an IPO with the sole purpose of using the proceeds to acquire one or more operating companies. SPACs are generally established and initially financed by experienced founding shareholders, often referred to as sponsors, who then utilize their expertise and track record to acquire attractive private companies, thereby offering such private companies a faster, alternative route to listing. The majority of IPO funds raised are typically placed in an escrow account and reserved primarily for the consummation of business combination through a merger, share exchange, asset acquisition or other business combination methods. After its IPO, a SPAC typically has 18-24 months to complete the business combination, and if it fails to do so, it will be liquidated and any funds in escrow will be returned to the investors (public and non-public) in accordance with the relevant escrow agreement.
The Singapore Exchange (“SGX”) recently finalized its listing rules for special purpose acquisition companies (“SPACs”) on the Mainboard of the SGX. Sponsors contemplating a SPAC listing may now consider listing in Singapore, as SGX’s previous listing rules precluded SPACs from listing on the SGX. Although SPACs are not new to Asia (the Korea Stock Exchange’s first SPAC listing occurred in 2010), the SGX’s revision to its listing rules is the latest move by stock exchanges within the Asia-Pacific region to compete in the global market for SPAC listings. The implementation of SGX’s detailed regime for SPAC listings is expected to attract and promote investment opportunities in Singapore.
In recent years, SPACs have become a significant force in global capital markets. In Q4 2020, SPAC listings accounted for 30% of global initial public offering (“IPO”) proceeds. Market observers project that SPACs will remain an important source of growth in stock markets in the coming years. Indeed, 2021 has already seen a total of 424 SPAC IPOs in the United States, demonstrating that the SPAC concept still has momentum in the market, and that investors retain their appetite to invest in attractive private companies.
However, interest in SPAC listings may be waning in the U.S., in part due to increased scrutiny by government regulators – only 76 SPAC IPOs occurred in Q2 2021 as compared to the 310 SPAC IPOs in Q1. This slowdown in the SPAC market in the U.S. provides an opportunity for Asian securities exchanges, which have, to date, remained largely untapped markets for SPACs. With Singapore now serving as an example, other exchanges in comparable jurisdictions, such as Hong Kong and Indonesia, are likely to follow with listing rules for SPACs of their own.
Singapore’s New Listing Framework
On September 2, 2021, the SGX published its updated Mainboard rules in the Proposed Listing Framework for SPACs (Response to Comments on Consultation Paper) (the “Consultation Paper”) along with a practice note to provide issuers with further guidance on the SGX’s requirements for SPACs. The Consultation Paper was the result of several months of consultation and feedback from various industry players, including banks, law firms, auditors and venture capital funds.
SPAC Listing Requirements
The updated Mainboard rules require SPAC issuers to have, among other requirements, the following key attributes:
a. Market capitalization: a minimum of US$150 million market capitalization, based on the issue price and the post-invitation issued share capital;
b. Shareholding requirements:
(i) at least 25% of the total number of issued shares shall be held by no less than 300 public shareholders at the time of the IPO;
(ii) SPACs may not adopt a dual class share structure at the timing of listing; and
(iii) sponsors must hold minimum equity of between 2.5% to 3.5% upon the listing, but cannot hold, in aggregate, more than 20% of the shareholding interests of the SPAC’s total issued share capital;
c. Moratorium/lock-up period: the sponsors, management team, controlling shareholders, and pre-IPO investors and their respective associates are subject to a moratorium/lock-up period on their direct and indirect shareholding interests between listing and closing of the SPAC’s business combination;
d. Share price and trading restrictions:
(i) the issue price at listing must be at least US$5 per unit;
(ii) SPAC units may consist of a share and warrant (or other convertible securities), and any warrant (or other convertible securities) issued with a SPAC unit may be detached from such unit of the SPAC and traded separately;
(iii) any warrant (or other convertible securities) separately traded on the SGX must not be (i) priced lower than the price of the SPAC unit, or (ii) exercisable prior to the completion of the SPAC’s business combination;
e. Escrow arrangements:
(i) at least 90% of the gross IPO proceeds must be held by an independent escrow agent pending the business combination;
(ii) interest or income generated from the escrowed funds may be drawn down for business combination or liquidation purposes;
(iii)the escrow agreement must, among other requirements:
- be governed by Singapore law;
- require the escrow agent to disclose any confidential or other information to the SGX upon request;
- require the escrow agent to take appropriate measures to ensure proper safekeeping, custody and control of the funds held in escrow;
- require the return of the escrow fund to shareholders on a pro rata basis upon liquidation of the SPAC or upon such shareholders voting against the proposed business combination; and
- include a three months’ notice period for both the escrow agent and the SPAC to notify the SGX upon termination of the escrow arrangement;
f. Dilution limit: the maximum percentage dilution to shareholders arising from the conversion of warrants issued at IPO is capped at 50% of the SPAC’s post-invitation share capital (inclusive of the promote); and
g. Promote: the extent of the aggregate equity interests in the SPAC awarded as compensation to the sponsors, management team, and their associates at nominal or no consideration is generally permitted up to 20% of the issued share capital of the SPAC on a fully diluted basis immediately following closing of the IPO, but the SGX retains its discretion in consideration whether such award is appropriate.
SGX Listing Analysis
In addition to setting the baseline requirements for an SGX-listed SPAC, the Consultation Paper also described the elements that the SGX will consider in its listing analysis. In determining whether a SPAC is suitable for listing, the SGX has discretion to take into account any factor it considers relevant, including, but not limited to:
(a) the track record and reputation of the sponsors and the experience and expertise of the issuer’s management team;
(b) the issuer’s business objectives and strategy;
(c) the nature and extent of the management team’s compensation;
(d) the extent and manner of the sponsors and the management team’s securities participation in the issuer, including equity interests acquired by the sponsors, management team, and their associates at nominal or no consideration prior to or at the IPO; and
(e) the alignment of interests of the sponsors and the management team with the interests of other shareholders.
The updated listing rules also set forth the applicable deadlines and requirements for SGX-listed SPACs. Once listed, a SPAC will have 24 months from the date of listing to enter into a legally binding agreement for a business combination and shall have up to an additional 12 months from that agreement to complete the business combination. The entire process is subject to an overall maximum time limit of 36 months from the date of listing. Any other extension may be permitted under limited circumstances by application to the SGX and approval of the independent shareholders of the SPAC.
The business combination must also have a fair market value of at least 80% of the amount in the escrow account at the execution the binding transaction. Amounts held in the escrow account, representing deferred underwriting fees or other payables on any income generated from such account, are excluded.
A detailed list of amendments made to the Mainboard Rules of the SGX can be found in Appendix 2 and 3 of the Consultation Paper here.
The implementation of SGX’s detailed regime for SPAC listings is expected to attract and promote investment opportunities in Singapore, while other Asian financial hubs race to introduce their own SPAC regimes. During Q1 2021, stock exchanges in Asian jurisdictions, namely Hong Kong and Indonesia, have contemplated introducing new listing rules or adapting their existing listing rules to expressly allow for SPAC listings. Until the applicable listing rules are introduced or adapted, SPACs will not be able to list in either Hong Kong or Indonesia.
Hong Kong SPAC listing rules consultation
In March 2021, the Securities and Futures Commission of Hong Kong and the Stock Exchange of Hong Kong (“HKEx”) began exploring the possibility of a SPAC listing framework in Hong Kong to further enhance the city’s competitiveness as an international financial center while safeguarding investors’ interests. As of the date of this article, HKEx continues to study the feasibility of a SPAC framework and has announced that it expects to launch a consultation on changes to its listing rules to allow SPAC listings in Q3 2021. Such consultation will likely be done through the publication of a consultation paper on the HKEx website, on which interested market participants will be invited to provide feedback to the HKEx within a specified period of time.
Some Hong Kong market participants have speculated that reconciling the new, permissive SPAC regime with the city’s regulatory stance against backdoor listings in recent years may be difficult. This inherent tension may explain HKEx’s delay in initiating its consultation. Nonetheless, observers expect that HKEx will soon publish a draft Hong Kong SPAC listing regime for consultation with the market given the announced timeline.