Proposed rules show bourse has paid close attention to criticisms of structure set its expectations

THE Singapore Exchange (SGX) has launched its consultation on special purpose acquisition companies (SPACs), and it shows that the bourse has paid close attention to the criticisms of the structure.

 

With proposed rules such as minimum market capitalisation, limiting redemptions to dissenting shareholders, as well as minimum sponsor equity participation and shareholding moratorium, the bourse has set the tone on what it expects.

 

Investors should cheer the better alignment of interests, even if the proposed structure raises the stakes for any sponsor planning on listing SPACs in Singapore.

 

After all, scrutiny on SPACs is rising in the US - where around 500 SPACs have raised about US$170 billion over the last 12 months.

 

The US Securities and Exchange Commission published an investor alert last month warning against investing in SPACs on the basis of celebrity involvement, and highlighted the differing economic interests of sponsors and investors.

 

There are also reports that the US regulator is making inquiries on the structure, with SPAC listings also starting to slow in recent weeks.

 

Against this backdrop, SGX' s proposals can be seen as taking the lead in identifying ways for the structure to be improved. This may set the stage for a more sustainable future for SPACs.

 

Sustainable trend

 

Stricter rules would mean fewer sponsors, but this is not necessarily a bad thing.

 

Market participants have already questioned the sustainability of the current pace of issuances in the US, and having rules that filter for the genuine candidates can be beneficial.

 

SGX needs quality growth or tech players to provide diversification in a market dominated by old economy stocks.

 

SPACs allow for negotiations between a target and a sponsor, helping to value business models with few comparables in the market. It can be thought of as an alternative to traditional initial public offerings (IPO) - meant for business models with a difficult story to convey that are not well-suited to the book building process.

 

If the early SPACs manage to do this well, investors will become more familiar with tech or growth stocks and such companies may even be able to list via a normal IPO in future.

 

SPACs should not be a backdoor for companies that aren' t ready for public markets, and the proposed rules go some way to reduce such risks.

 

For instance, SGX wants sponsors to have a minimum equity share and a moratorium on their shareholding interest.

 

It also wants to prevent independent investors from redeeming their capital in SPACs if they vote for a transaction to proceed. This is distinct from the US, where investors can vote for a transaction to proceed but then pull out their capital while retaining a free warrant for potential upside.

 

Both these measures would encourage sponsors to bring forward only quality targets with sustainable businesses. Anything else would likely result in a rejection, and potential losses.

 

It also encourages long-term genuine investors to enter at a SPAC' s IPO, rather than those who simply want to capitalise on an opportunity at the expense of diluting others.

 

And for the long run, it is this more sustainable approach that SGX needs.

 

While it is possible that market forces and investor discipline could have done the same, the situation in the US - where even those with no obvious relevant experience are raising SPACs - does not suggest that rational behaviour would prevail.

 

Considering that most Singapore retail investors are less familiar with tech or growth investments, having the guardrails of a credible sponsor with regulations pushing for aligned interests is even more important.

 

Striking a balance

 

There are risks to this approach, chiefly that Singapore' s SPAC framework could see minimal participation.

 

The proposals are a step in the right direction, but SGX must also ensure that the rules will not be deal-breakers for the quality sponsors. Already, market participants have said that the minimum market capitalisation of S$300 million is too steep.

 

And given the depth and breadth of the US market, it might be an uphill climb for SGX to attract SPAC listings with a stricter regime.

 

SGX must, therefore, take the time to analyse the feedback from the consultation and identify any deal-breakers in its proposals that must be tweaked so that it finds a workable solution that can still attract quality sponsors.

 

It should not be investor protection at all costs - investors too must be responsible and study the pros and cons of SPACs, if they want to invest in them.

SINGAPORE Exchange (SGX) has launched a consultation on Special Purpose Acquisition Companies (SPACs), with proposals to address some of the risks posed by the listing structure.

 

SGX Regulation (SGX RegCo) is seeking feedback on a framework that would attempt to reduce some of the risks of excessive dilution for long-term investors, as well as the rush for sponsors to de-SPAC.

 

" Ultimately, we want our SPACs to be credible listing vehicles that result in successful value-creating business combinations for their shareholders," said SGX RegCo chief executive Tan Boon Gin at a media briefing. " This will increase investor choice, and add depth and diversity to our market."

 

He noted that SGX has received feedback that Asian SPACs would be of interest to investors and sponsors as it would be in the same time zone as Asian targets that may be more familiar to investors here. " I think if everything goes well, we are targeting to introduce a framework by the middle of the year, but it all depends on the feedback," he added.

 

Also known as a blank-cheque company, a SPAC is a shell entity formed by a group of investors - known as sponsors - who raise capital from other investors via an initial public offering (IPO). The purpose is to acquire a target business within a set timeframe and take it public - also known as a business combination or de-SPAC. If a suitable deal is not found, investors can redeem their capital.

 

The fundraising structure surged in popularity on Wall Street over the past year. Mr Tan pointed to Refinitiv data in early March showing US SPACs raising US$64.2 billion in IPOs so far this year, accounting for 76 per cent of total equity raised in IPOs.

 

But concerns have also emerged, with the US Securities and Exchange Commission warning in March that investors and sponsors may have differing economic interests. The regulator has reportedly opened an inquiry into the listing scheme.

 

SGX is therefore seeking a " balanced regime" to safeguard investors' interests while meeting capital raising needs of the market.

 

It has proposed for Singapore SPACs to have a minimum market capitalisation of S$300 million, in line with mainboard rules, with a timeframe of three years to de-SPAC. At least 90 per cent of IPO proceeds will be placed in escrow pending acquisition of a target.

 

The higher market cap - above the US$50 million requirement in the US - serves to ensure a SPAC is backed by experienced and quality sponsors and/or management with proven track record and repute, SGX said, adding it would also facilitate consummation of a " quality and sizeable business combination" .

 

Stefanie Yuen Thio, joint managing partner at TSMP Law Corporation, said a target should be a strong business given the inherent risk of investing in a shell company.

 

" You shouldn' t list mom-and-pop shops via a SPAC," she noted. She added, however, that the minimum threshold implies an asset acquisition ticket size of more than S$1 billion, which is ambitious. " This may be too high a hurdle especially for a fledgling market trying to break into SPACs."

 

SGX also intends to limit capital redemption rights at de-SPAC to independent shareholders who voted against the business combination, as " it is reasonable for shareholders to align their interests with and stand by their voting decisions" .

 

Investors in the US can redeem their shares and get their money back - regardless of how they vote on a business combination - while retaining warrants in the SPAC.

 

Mr Tan said this could result in free-riding. Investors might redeem their shares but exercise their warrants when the stock outperforms, diluting long-term shareholders.

 

The bourse is also considering making warrants undetachable from shares, so that they are nullified when a share is redeemed. Alternatively, it is considering a cap on the dilutive effect of the warrant.

 

Limiting redemptions to dissenting shareholders would also encourage responsible voting and mitigate a rush to de-SPAC, Mr Tan said.

 

To align the interests of sponsors and independent shareholders, SGX has proposed that only independent shareholders and directors be allowed to vote on business combinations - with a simple majority required - so sponsors cannot force deals through.

 

The bourse intends to require a minimum equity participation by sponsors of between 1.5 and 3.3 per cent, depending on the SPAC' s market capitalisation. It is also proposing a moratorium on shareholding interests held by key parties at various junctures.

 

Tham Tuck Seng, capital markets leader at PwC Singapore, said the moratorium would ensure sponsors do not just do an acquisition and disappear.

 

Some of the existing listing requirements will also be implemented for SPACs, although Mr Tan emphasised that the de-SPAC process would not be a " full-blown IPO process" .

 

For instance, any de-SPAC will require " prospectus-level disclosures" on the business being acquired. A shareholders' circular, with information such as financial position and company management, must be submitted to SGX for review. And issuers that do not meet listing requirements under mainboard rules will be delisted.

 

The exchange is also proposing that a financial adviser, who is an accredited issue manager, be appointed to advise on the de-SPAC, and an independent valuer should also value the target company.

 

Mak Yuen Teen, associate professor of accounting at National University of Singapore, said SGX has thought through the risks and understands it cannot simply transplant the US SPAC model to Singapore, given the different institutional environment and weaker investor protection here.

 

" One would expect what remains will be the better candidates since those who shy away from the safeguards are probably those best avoided," he said.

 

Another issue would be the implementation and enforcement of the safeguards, Prof Mak added. " I have seen too many cases of questionable due diligence of companies that have gone through IPO and therefore have my doubts about the standard of due diligence we will see for SPACs."

 

Michael Lints, partner at venture capital firm Golden Gate Ventures, said some of the proposals by SGX make sense - such as giving sponsors three years to find quality targets. But he said some flexibility should also be considered in respect of market capitalisation, particularly if the exchange wants to be competitive when looking at tech companies.

 

There is some risk that the tougher regulatory regime will deter SPAC listings here. TSMP' s Ms Yuen Thio said: " My concern is that tinkering with the terms will make the SPAC framework less attractive for market players who are used to and have priced in US-style SPACs."

 

But Mr Tan noted recent SPACs in the US are already trying to address risks with commercially negotiated terms. " In terms of the direction of travel, we can see that the market discipline in the US market is already kicking in," he said. " We think that whatever it is that we are proposing will actually be in line with these trends."

 

The consultation will be open until April 28, and the public can provide feedback to SGX.