Special Purpose Acquisition Companies (SPAC) or \”blank cheque companies\” have been on a rise in 2021. In the United States, a record of US$83.3 million were raised in 2021, 6 times more than the year before. As of March this year, the total SPAC funding raised has eclipsed 2021's record, hitting US$87.A million within 3 months.
With the SPAC trend generating so much buzz globally, our local Singapore Exchange (SGX) has launched a market consultation with the potential to start SPAC listing when this year. Additionally, SPAC has been gaining momentum among Singapore companies using the likes of Grab, One Championship and Property Guru seeking to potentially merge or start their own SPAC in the United States.
What Exactly Is SPAC And What makes them Known As \”Blank Cheque Companies\”?
Created in the 80's, SPAC is definitely an alternative listing structure for a company to raise capital from the public to get one or more companies. The acquired entity have to be a private (unlisted) company.
SPACs are usually given 24 to Three years to identify companies and \”De-SPAC\” – whereby identified information mill acquired and merged in to the publicly trading SPAC holding company. This structure can also be the reason why SPACs are called \”blank cheque companies\”.
Upon listing, each shareholder is offered a share and a proportion of a warrant. The warrant may be the right to buy stocks from the SPAC at a given price within a timeframe.
While the SPAC is sourcing the right acquisition target, the money raised in the SPAC listing will be placed in a trust. The capital in trust can only be used for costs relevant to acquiring and \”De-SPAC-ing\”. In case, a SPAC does not manage to find the prospective acquisition, they can either request for an extension or return the funds back to the shareholders.
As with all listings, the SPAC would have to clear regulatory requirements prior to going on the stock exchange. These pre-listing regulatory requirements usually involve ensuring a proper track record on the management team or sponsors, and a reasonable criterion for potential acquisitions. There is no substantial financial due diligence conducted on the SPAC before listing since it is a company without any revenue.
How Is SPAC Not the same as Conventional IPO?
#1 Conventional IPO Requires A Revenue Generating Company While SPAC Is really a Temporary Fund
For conventional IPO, it requires a healthy company with historical financial track records to generate reasonable interest from public investors. This enables investors to see and determine on their own if they would want to invest in the organization. As an investor, you have a clear sight as to the company you are buying into when you invest in an IPO.
On the other hand, SPAC is a temporary fund formed with the purpose of acquiring private entit(ies). Once the funds are raised, the management team sources and determines the non-public companies that are suitable for acquisition. Being an investor, you do not necessarily know the companies you are buying into when you invest into a SPAC, instead, you are relying on the capabilities of the management team to source for the right acquisition(s)
#2 Conventional IPO Gives Company Share, While SPAC Gives Company Share & Warrant
During an IPO, investors get to subscribe for the initial listing and receive shares from the company upon purchase.
For SPAC, when investors subscribe for that initial listing, they not just receive shares but also a full or partial warrant for every share acquired. For example, for each share acquired, an investor could receive a quarter warrant. For a warrant to become executed, it needs to be a whole warrant.
Having a warrant allows the investor to purchase more shares from the SPAC at a fixed price and investors usually execute or sell warrants during the pre-merger phase. Pairing warrants with shares is a structure that tries to compensate the risk the SPAC shareholder took to invest before a target company is made known.
#3 Conventional IPO Valuation Is dependent upon Market But SPAC Has A Set Price
The act of listing a company on a stock exchange is to raise funds in the public. By going public, information mill placed under the market's scrutiny as well as their share value would be determined by their financial performance and capabilities.
Being a blank cheque company, SPAC does not generate any revenue. Hence, potential investors wouldn't be able to properly assess the cost of a SPAC share. Therefore, the initial listing price of SPACs tends to have a fixed floor. In the usa, SPACs list at an average cost of US$10 or higher.
#4 SPAC Reduces Time & Cost Required to List Compared To A Conventional IPO
Based on a PriceWaterhouseCoopers (PWC) report, upon finding a target company, a SPAC may take 3 to 6 months to list the acquired company. The listing process can save on underwriting and legal cost as SPAC management teams are often financial professionals themselves with experiences in taking companies public. This process is almost 4 times shorter than a conventional IPO, which can take 12 to 1 . 5 years.
#5 SPAC will De-SPAC
As a shareholder of the public company, major corporate activities that can result in large valuation changes aren't that common. However, because of the nature of SPAC, shareholders can get to be involved in at least one major corporate event – \”De-SPAC-ing\”
\”De-SPAC\” is the procedure whereby the SPAC acquires or merges with a number of companies. This process is similar to a public company acquiring or merging with another company. With respect to the SPAC, shareholders may get to vote around the transaction. If not, shareholders can pick to redeem their shares' portion of the trust fund or hold on and continue as a shareholder within the newly merged entity.
Read Also: Step-By-Step Help guide to Subscribing To An IPO (Through Internet Banking)
Currently, apart from the United States, SPACs can be found on other international exchanges for example Euronext Amsterdam, Euronext Paris and Frankfurt stock exchange. As SPAC gains global momentum, Singaporean investors should know this new listing structure and it is potential launch in Singapore. As the exact details of how SPAC in Singapore has not yet been ironed out, the generic overall structure of SPAC is really as mentioned above. Investors can expect to see a SPAC listing as soon as the end of 2021 when the current public consultations by SGX proceed smoothly.