SPAC Listing Rules by the Singapore SGX: 8 Features

On 2 September 2021, the Singapore Exchange (SGX) announced a new SPAC listing framework, which enables Special Purpose Acquisition Companies (SPACs) to be listed on the Mainboard of the Singapore Exchange Securities Trading Limited (SGX-ST) effective 3 September 2021.

With the first application for a SPAC listing reaching our shores within the next couple of weeks, you might be interested to find out more about the relevant rules in Singapore for listing SPACs on the SGX-ST, and whether your business should consider going public using a SPAC.

This article will address the 8 key features of SGX’s SPAC listing framework, with some quick concluding thoughts about how the new framework could affect your decision to go public via a SPAC in Singapore.

The 8 key features that will be discussed include:

• Minimum market capitalisation requirement
• Timeframe for de-SPACing
• Moratorium on shareholdings
• Minimum subscription requirement
• Approval requirements for business combination
• Detachable warrants and conditions for the conversion of warrants
• Redemption rights by independent shareholders
• Limit on sponsor’s promote

What are SPACs?

SPACs refer to publicly traded shell companies formed by investors (also known as sponsors) for the sole reason of raising capital through an Initial Public Offering (IPO) and acquiring an existing operating company.

For owners of existing operating private companies, merging their company with a SPAC (or entering into a “business combination”) is an alternative way of taking their company public. This is as opposed to the traditional IPO process, which may be a longer and more expensive process. The private company seeking a merger with a SPAC is also known as a target company.

You can read more about how a SPAC works in our other article.

8 Key Features of the SGX’s SPAC Listing Framework

1. Minimum market capitalisation requirement

SPACs have to satisfy a minimum market capitalisation requirement of $150 million at the time of listing. The rationale behind this is to ensure that SPACs listed in Singapore will be backed by experienced and quality sponsors while at the same time not setting the requirement too high such that sponsors face difficulty finding a suitable target company in the region.

This is because target companies are typically 3 to 8 times the initial size of the SPAC, and imposing a higher minimum market capitalisation requirement for SPACs would limit the pool of target companies available for business combination.

2. Timeframe for de-SPACing

After a SPAC completes its IPO, it usually has a fixed amount of time to identify a suitable target company, and complete a business combination with said company. If the SPAC is not able to identify a company, or complete its business combination with the company by the end of the prescribed time, the SPAC liquidates, and the shareholders of the SPAC get their investments back.

On the other hand, if the SPAC is able to identify and complete the business combination with a target company, that process is known as de-SPACing. Thereafter, the merged company continues operating as a public company.

Under SGX’s SPAC listing framework, the de-SPACing must take place within 24 months of IPO. An option to extend the deadline by 12 months is available in two scenarios:

1. The SPAC would qualify for an automatic time extension if the SPAC has entered into a legally binding agreement with a target company but has not been able to complete the business combination before the end of the 24-month period. This is subject to the fulfilment of prescribed conditions such as notifying SGX of the need for such an extension, and announcing the extension via the SGXNet portal.
2. If the SPAC has yet to enter into a legally binding agreement for a business combination before the end of the 24-month period, SGX can also grant a time extension upon application by the SPAC 2 months prior to the expiry of the 24-months period. In order to apply for an extension of time, the SPAC would have to obtain the approval of a majority of at least 75% of the votes of its shareholders. The SGX will grant the time extension if it is satisfied that there is a compelling reason for the time extension or that it is in the public interest to grant an extension.

The 24-month period for de-SPACing is consistent with the typical market practice of SPACs in the US. The SGX also decided to include the option of getting a time extension to provide SPACs with some flexibility to search for a quality target company. The worry was that under the time pressure of an impending fixed deadline, SPACs might rush to complete their business combination with a less ideal target company or on less favourable terms.

3. Moratorium on shareholdings

Under the SGX’s SPAC listing framework, there are three moratorium periods on the sale of shares of the SPAC’s founding shareholders, the management team, and their respective associates. The effect of the moratorium is that during those three periods, these groups of individuals are either not allowed to sell their shares in the SPAC, or are restricted as to how much of their shareholdings they can sell.

The three moratorium periods are as follows:

1. From the date of listing (i.e., the date of the IPO) till the completion date of the business combination (i.e., the date of the de-SPACing), the moratorium applies to the individuals’ entire shareholdings.
2. For 6 months after the completion of the business combination, the moratorium applies to the individuals’ entire shareholdings.
3. For 6 months after that, the moratorium applies to 50% of the individuals’ shareholdings.

Additionally, the second and third moratorium periods above also apply to the shareholdings of the “resulting issuer’s” controlling shareholders, associates, and executive directors with an interest in 5% or more of the issued share capital. The “resulting issuer” refers to the company that trades on the SGX-ST after the completion of the business combination.

The purpose of the moratorium requirement is for the key persons involved in the SPAC’s IPO to align their interests with the SPAC shareholders, and to remain invested in the future growth and strategy of the SPAC.

With a moratorium in place, the key persons would have to hold on to their shareholdings for a minimum required period, which would incentivise them to commit to the success of the SPAC’s business combination.

4. Minimum Subscription Requirement

Depending on the market capitalisation of the SPAC, the SPAC’s founding shareholders and management team must, in aggregate, subscribe for a minimum value of equity securities. An equity security represents an ownership interest held by shareholders in an entity, usually in the form of shares. In other words, the SPAC’s founding shareholders and management team must own a minimum quantity of shares in the SPAC.

The requirements are as follows:

For example, if the SPAC in question has a market capitalisation of $450 million, then the founding shareholders and management team must own at least 3.0% of the SPAC’s shares.

The aim of including a minimum subscription requirement is the same as the rationale of imposing a moratorium. That is, to enhance the alignment of interest between the founding shareholders and management team on one hand, and the other independent shareholders of the SPAC on the other, in order to protect the latter group of investors. To this end, the minimum subscription requirement ensures that the SPAC’s founding shareholders and management team have “skin in the game”.

5. Approval requirements for business combination

In order for the business combination between the SPAC and the target company to be confirmed, it has to be approved by:

• More than 50% of the SPAC’s independent directors; and with
• More than 50% of the SPAC’s shareholders voting on the business combination proposal at a general meeting.

The SPAC’s founding shareholders, management team and their associates are also allowed to participate in the vote to approve the business combination. However, they are not permitted to vote with shares acquired at nominal or no consideration before or at the IPO of the SPAC.

For example, if an associate holds 5% of shares in the SPAC, 1% of which was acquired for free and the remaining 4% of which was acquired at market value, then that associate may vote with only the 4% of shares.

6. Detachable warrants and conditions for the conversion of warrants

A stock warrant gives an investor the right to purchase the underlying security for a particular price. In the context of a SPAC, a SPAC would usually issue units to investors, comprising common shares and warrants, when it IPOs. These warrants cannot be exercised prior to the completion of the business combination.

The SGX decided to retain the detachability of warrants (i.e., the shares and warrants would not have to be traded as a single unit on the Mainboard of SGX-ST). This was in recognition that the detachability of warrants, and the ability to transact shares and warrants separately, are the main draw for SPAC IPO investors, who require some benefits in return for investing in a SPAC for up to 36 months.

However, shareholders of the merged company might be concerned that after the business combination, there may be significant dilution to the shares that they are holding on to if the initial investors are able to exercise their warrants without restrictions. To address this concern, the SGX has imposed a maximum percentage cap on the impact of dilution to shareholders after the business combination as a result of the exercise of warrants.

Specifically, the maximum percentage dilution to shareholders arising from conversion of warrants issued at the SPAC’s IPO is capped at 50% of the SPAC’s post-invitation issued share capital. The SPAC is also required to disclose the maximum percentage cap that it decided on in the IPO prospectus as well as in the circular to shareholders for the business combination.

7. Redemption rights by independent shareholders

During a SPAC’s IPO, it attracts capital from investors, which the SPAC is required to place in an escrow account. A “redemption right” refers to a shareholder’s right to redeem its ordinary shares (i.e. sell its shares back to the SPAC), and receive a pro rata portion of the amount in the escrow account in cash, if the business combination is approved and completed within the permitted timeframe.

Under the SGX’s SPAC listing framework, the redemption right by independent shareholders is not to be linked to their voting decisions on the business combination. In other words, regardless of whether they voted for or against the business combination, all independent shareholders will be able to redeem their shares in the SPAC and receive a pro rata portion of the amount held in the escrow account.

8. Limit on sponsor’s promote

A SPAC sponsor, the founding shareholders and management team, often gets shares in the merged company after the business combination, either for free or for nominal value. This practice of receiving shares for free or for nominal value is known as a “promote”.

The commercial justification for allowing a SPAC sponsor to obtain this reward is to incentivise the sponsor to invest in the costs of getting a SPAC to the point of an IPO in the first place. This is especially since the SPAC sponsor usually pays for such costs out of their own pocket.

The SGX decided to impose a limit on the sponsor’s promote of up to 20% of issued shares at IPO to achieve the following aims:

• To reinforce the alignment of interests between the sponsor and the independent shareholders, as the granting of the promote is typically an incentive for a sponsor to achieve business combination, as opposed to ensuring the resulting issuer’s long-term success; and
• To mitigate the impact of dilution to the SPAC’s shareholders who remain with the merged company, since the sponsor’s promote is one of the major contributory factors to dilution.

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As can be seen by the motivations behind the key features listed above, the main themes of the SGX’s SPAC listing framework are:

• The protection of investors through aligning the interests of the SPAC sponsor and the other independent shareholders;
• Ensuring the quality of SPACs that are listed on the SGX-ST’s Mainboard; and
• Ensuring the quality of target companies that eventually merge with the SPAC and go public.

If you are a business owner exploring the prospect of going public via a SPAC in Singapore, the SGX’s SPAC listing framework would make the option more attractive, with the multiple considered safeguards and requirements put in place in line with these themes.

To discuss this possibility further, consult a corporate lawyer who will be able to advise you on the costs and benefits of using a SPAC to take your company public in Singapore, as well as potential regulatory requirements that you should be aware of when doing so.

Get in touch with experienced corporate lawyers in Singapore here.