What are Special Purpose Acquisition Companies (SPACs)?

A special purpose acquisition company (SPAC) is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO). Commonly known as “blank-check company”, a SPAC has no prior operating history, operating or revenue generating business or asset at the point of IPO. Such a business structure allows investors to contribute money towards a fund to acquire one or more unspecified businesses in accordance with the business strategy or acquisition mandate set out in the IPO prospectus. Funds raised from a SPAC IPO are held in trust for a predetermined period of time until an acquisition of a private business is made, known as a de-SPAC transaction or SPAC merger.

The investors behind the SPAC, referred to as sponsors, are typically experts in management and deal advisory, and may include corporate entities and even the likes of celebrities and sports stars. Investors are given the right to vote for or against the acquisition, and may redeem their shares if they vote against. At the expiry of the predetermined period before any acquisition is made, the SPAC is liquidated with all funds returned to the founders and IPO investors. Following a successful SPAC merger, the sellers of the target business may receive cash, equity in the SPAC, or a combination thereof. In many cases, the sellers of the target business will retain some ownership in the merged entity. The post-merger combined entity moves forward as a publicly traded company.

Recent Developments for SPACs

Though SPACs has been around since the 1990s, the recent years saw SPAC’s resurgence in popularity attributable to low interest rates, abundant liquidity in the US market and increasing number of acquisition targets, especially in the tech space. Year 2020 registered more SPAC IPOs than in all previous years combined with 248 SPAC IPOs. The United States (Nasdaq Stock Market and New York Stock Exchange) currently account for majority of the listing of SPACs, with several other stock exchanges, including, but not limited to, the Toronto Stock Exchange, Bursa Malaysia, London Stock Exchange and Korea Exchange permitting SPACs to be listed.

US stock exchanges registered 350 SPAC IPOs with total funds raised close to US$100 billion in first half of 2021. This surpasses the US$83.4 billion raised in the entire 2020, mainly due to the top 4 SPACs raising funds in excess of US$1 billion each. Even though traditional IPOs still dominate over SPAC IPOs in terms of volume and total funds raised, average size of SPAC IPOs came close to traditional IPO size at US$300 million level in 2020 and first quarter of 2021. In addition, the US market has recorded 83 completed SPAC mergers in 2020 while 1Q2020 and 2Q2020 saw a pipeline of 89 and 60 announced SPAC deals respectively, as indication of strong confidence in SPAC investments.

Joining the SPAC bandwagon are multiple high-profile businesses such as Virgin Galactic Holdings, Inc., Restaurant Brands International Inc., Lucid Motors, Opendoor Technologies Inc., Grab Holdings Inc. and WeWork.  In April this year, Grab Holdings announced its US$40 billion merger with a publicly-listed shell company backed by Altimeter Capital, marking the biggest ever deal with a blank cheque firm. Others that are possibly aiming for a SPAC listing in US include Singapore’s online real estate firm PropertyGuru, e-commerce platform, Carousal and mixed martial arts firm One Championship, as well as Indonesian online travel booking platform, Traveloka.

SPACs have garnered much appeal for the reasons below:

Shorter timeline to list: Traditional IPOs typically require 12 months or more to complete. In the case of a SPAC merger, the target business can be listed in three to five months, assuming it has stable financial controls system and proper corporate governance structure in place. Hence, this may also translate into lower cost involved given the shorter planning and execution timeframe.

Certainty of valuation and funds raised: Traditional IPOs is dependent on the book building process influenced by market demand and market sentiments. On the other hand, valuation and funds raised through the SPAC business combination will be privately agreed between the management team of the SPAC and the target company, thus ensuring the success of the listing exercise.

Quality sponsors and management team: The target company can benefit from the experienced leadership and/or strategic guidance of the sponsors and appointed management team after going public.

Notwithstanding the benefits above, investors should be aware of the risks associated with SPAC listing.

Failure to complete de-SPAC transaction: SPACs may not be able to identify a suitable target company or successfully consummate the business combination within the pre-determined time frame. Even after extensive due diligence and negotiations on the business combination proposal, the transaction might eventually be rejected by shareholders.  This may result in the liquidation of the SPAC, thereby also causing investors loss of opportunity in other higher returns investments.

Poor quality of target companies: There is an inherent uncertainty to the target company. In the course of rushing to complete a business combination, sponsors may compromise on quality of targets and standards of due diligence, especially so in the market where SPACs are chasing after targets.  This may be aggravated by the fact the de-SPAC target is not subject to the same level of review and scrutiny as that of a listing applicant under the traditional IPO route.

Proposed Listing Framework for SPACs on the Singapore Exchange (SGX) Mainboard

In view of renewed and increasing interest in the listing of SPACs, SGX has, on 31 March 2021, issued a consultation paper inviting public comments on a proposed regulatory framework for the listing of SPACs on its Mainboard.

Below are the proposed criteria for the listing of SPACs:

1. Broad admission criteria

• A SPAC must have a minimum market capitalisation of S$300 million.
• At least 25% of the SPAC’s total number of issued shares must be held by at least 500 public shareholders at the date of SPAC listing.
• A minimum issue price of S$10 per share or unit.
• A SPAC must be incorporated in Singapore.
• A SPAC will not be permitted to adopt a dual class share structure.
• At least 90% of IPO proceeds placed in escrow pending the acquisition of a target company. Cash will be returned on a pro rata basis from the amount in escrow to any shareholder voting against the business combination or upon the liquidation of the SPAC.
• Any warrant (or other convertible securities) issued with the ordinary shares of the SPAC at IPO must be non-detachable from the underlying ordinary shares of the SPAC for trading on SGX.

2. Conditions for founding shareholders, management team and controlling shareholders

• Founding shareholders and/or the management team must hold minimum equity at IPO of between 1.5% to 3.3%, depending on the SPAC market capitalisation then.
• Moratorium on the shareholding interests held by founding shareholders and controlling shareholder(s) from date of SPAC listing until at least 6 months from date of completion of the business combination.
• Moratorium on shareholding interests held by Executive Directors who hold 5% or more for a period of 6 months from date of completion of the business combination.
• Shareholders who vote against the business combination will have the right to redeem their ordinary shares and receive a pro rata portion of the amount held in the escrow account in cash (“Redemption Right”), in the event the business combination is approved and completed within the permitted time frame. Upon exercise of the Redemption Right by the shareholders who have voted against the business combination, the warrants or other convertible securities (if any) shall be nullified and void.

3. Business combination requirements

• Three-year permitted time frame from IPO date to complete the business combination.
• Business combination must comprise at least one principal core business with a fair market value forming at least 80% of the gross IPO proceeds in escrow.
• Resulting business combination will have to meet the initial Mainboard listing criteria.
• The business combination can only proceed with approval from a simple majority of the SPAC’s independent directors and a simple majority of the independent shareholders.
• Liquidation of the SPAC may occur in the event of a material change in 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 the consummation of the business combination, unless independent shareholders vote for the continued listing of the SPAC.
• Appoint: (a) an accredited Issue Manager as Financial Advisor to advise on the business combination; and (b) an independent valuer to value the target company.
• Shareholders’ circular on the business combination must contain prospectus-level disclosures including key areas such as: (a) financial position and operating control; (b) character and integrity of the incoming directors and management; (c) compliance history; (d) material licences, permits and approvals required to operate the business; and (e) resolution of conflicts of interests.

Accounting and Valuation Considerations

The financial reporting requirements on SPACs are focused on the recognition and measurement of SPAC related investments such as the holding of SPAC traded unit, any attached warrants or convertible securities, private investments in public equity and business combination targets.

1. SPAC related investments

Fair value of any publicly traded share in an active market is the exchange price. In the case of SPAC, fair value of founder shares may be benchmarked to publicly traded shares with adjustment made for the success probability of the business combination and moratorium period that prohibits the sale of the shares as the SPAC for a period after the business combination is completed. Founders also do not enjoy the Redemption Right granted to holders of public shares who can vote against a potential acquisition and redeem their shares in exchange for an amount of cash roughly equal to the price they paid at the IPO. Founder shares in most cases actually expire worthless if an acquisition is not completed.

In summary, any SPAC-related investments such as earn-out arrangements and private investments in public equity are valued based on the terms of agreements, probability of a successful business combination and applicable market participant assumptions.

2. Warrants attached to the SPAC issued unit

Under current financial reporting standards, warrants or any other financial instruments may be classified as equity if they will be settled by the issuer exchanging a fixed amount of cash or another financial asset, denominated in the issuer’s functional currency, for a fixed number of its own equity instruments. Where this “fixed-for-fixed” criteria for equity classification fails, the warrants or financial instruments shall be classified as a financial liability. Likewise, in accordance with “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies”, published by the US Securities Exchange and Commission, depending on the specific terms and circumstances of the contract, warrants attached to a SPAC unit may be required to be classified as liability measured at fair value, with changes in fair value reported each period in earnings.

Fair value of private warrants is typically estimated using option pricing models such as Black Scholes or Binomial, with appropriate inputs. The valuation approach of the warrants may also vary with the stages within the SPAC life cycle and whether they are subsequently detached from the SPAC share to trade separately.

3. Fair value of the underlying target business for SPAC

The valuation of a SPAC target is no different from any other Merger & Acquisition valuation where market value is defined as the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion under the International Valuation Standards. In the absence of active/principal market for trading, such privately held company shares are valued using various valuation techniques and market participant assumptions.

Under financial reporting requirements for business combination, SPAC merger itself may require substantial analysis, depending on whether the SPAC or the target company is determined to be the accounting acquirer in the transaction. Specifically, the accounting acquirer is the entity that has obtained control of the other entity, which might be different from the legal acquirer (which is generally the SPAC).  If the SPAC is determined to be the accounting acquirer, the target company’s assets and liabilities, including intangible assets, will have to be fair valued and deducted against the purchase consideration to recognise any resultant goodwill. At consolidated level, any intangible asset value recognised would have to be amortised over its remaining useful life.

Conclusion

The SPAC phenomenon is expected to stay given its benefits when comparing with traditional IPO. The SPAC merger process with a target company may be completed in as little as three to five months, which is substantially shorter than a typical traditional IPO timeline. Nonetheless, a target company must have adequate financial reporting and corporate governance structure to comply with post listing requirements. In the current market situation where supply of SPACs exceed target companies, proper due diligence must be undertaken to ensure that sponsors and investors do not rush the consummation of SPAC merger and risk compromising on the quality of the post-combined entity. Investors should also be mindful of the various listing and financial reporting obligations arising from holding SPAC equities and complex financial instruments.

About CLA Global TS (formerly Nexia TS)
Founded in 1993, CLA Global TS (formerly known as Nexia T.S.), is an award-winning Asia-Centred Business Advisor. An independent member firm of CLA Global Network, CLA Global TS provides a full spectrum of professional services including, but not limited to Assurance & IPO Reporting, Tax, Risk Advisory, Valuation, Insolvency & Restructuring, Sustainability & Climate Change Advisory and more.

For more information, visit CLA-TS.com.