Conventus Law: SPAC vs IPO. What are the main differences and how to decide which is best for an asset company?
Eu Jin YANG: An initial public offering (IPO) involves a firm that has a history of operations, as well as a business and assets that generate income. An IPO also entails a long book-building and underwriting procedure by investment banks and other intermediaries, which can take anywhere from 9 to 12 months or longer to complete.
A SPAC eliminates the preceding prerequisites and may be completed in 3 to 6 months (this timeframe related to the time it takes for the SPAC to be listed and does not cover the acquisition of a business for the purposes of a business combination).
(i) To circumvent IPO requirements such as the need for financial and operating track records.
(ii) To avoid the uncertainty of the price discovery process that accompanies the book building and underwriting process of an IPO. The price discovery in an IPO depends on market conditions as well. With respect to SPACs, the issue price can be pre-negotiated before the listing.
(iii) To incur less expenditure (since there are no underwriting fees) and to spend less time than a traditional IPO.
(iv) To leverage the expertise of an experienced sponsor to assist and guide the target company that will be acquired to grow its business. SPAC sponsors often are experienced financial and industrial professionals. They can tap into their network of contacts to offer management expertise or take on a role themselves on the board.
(v) If the target company is a startup, SPACs allow the target company to negotiate favourable transaction conditions with the SPAC sponsor, such as valuation and investment flow (currently not available for the traditional IPO route).
Perhaps more crucially, a SPAC’s deal price occurs early in the process, at the moment the business combination agreement is signed, as opposed to an IPO, which occurs at the conclusion of the transaction. Locking in pricing earlier in the process has been especially attractive amidst markets roiled with uncertainty due to COVID-19.
Do SPACs offer an opportunity for investors such as Retail investors to invest in private companies that would otherwise only have been available in the private equity space?
SPACs offer to democratize venture capital and private equity transactions and make them available for retails investors. What was previously the domain of accredited and institutional investors are now becoming available to retail investors. It must be noted however, the riskiness of the investment which is the underlying reason for such deals being previously available only the institutional and accredited investors apply with equal force for SPACs. Retail investors should be aware of the “caveat emptor” principle and undertake the necessary research before investing in SPACs.
How do SPACs offer faster access to public capital and liquidity compared with a traditional IPO?
A SPAC listing usually occurs in 3–6 months on average, while an IPO usually takes 9-12 months. The faster execution offers faster access to capital.
SPAC deals may be done in tandem with PIPE (Private Investment in Public Equity). This additional funding in addition to original capital raised provides greater liquidity.
“We want the SPAC process to result in good target companies listed on Singapore Exchange SGX, providing investors with more choice and opportunities,” Tan Boon Gin, CEO of Singapore Exchange Regulation (SGX RegCo)
Who are SPAC sponsors? Is there a need for more due diligence on SPAC sponsors? How will the SGX conduct their due diligence on the SPACs sponsors?
The member(s) of the management team of the SPAC are known as the sponsor(s) of the SPAC. These member(s) are generally executives with the relevant expertise and experience. As a SPAC does not have business operations, there is very little information available about SPAC for investors to analyse.
Thus, the profile of the sponsors is crucial as any investment in the SPAC is essentially made in reliance on the sponsors.
SPACs shares are subscribed by investors who hope the sponsors will find them a good bargain and profit. A SPAC is nothing more than the credentials of its sponsors and the money it raises in its listing until a transaction is revealed.
As a result, rigorous due diligence on the SPAC’s sponsors, management team, and advisers is important. In addition to looking at their resumes and professional networks, it’s crucial to look into their track records and political ties, as well as make sure they have not been engaged in any instances of fraudulent or otherwise improper behaviour.
There are currently no restrictions on who can serve as a sponsor. However, it has been proposed that the sponsors be subjected to the following due diligence procedure:
First, for a SPAC comprising of an international management team, it is critical to undertake checks in the countries where the people are presently situated, and also in their previous residences.
It has been reported before that individuals involved in SPACs have been being pursued by creditors or fraud investigators in other countries. As most databases are localised in nature, it is important to check in the local legal databases.
Second, the source of funds for every SPAC sponsor must be checked. Due diligence can uncover charges of fraud within a firm, as well as data about an individual’s career path, relationships and/or close relatives, which could raise questions about the sponsor’s financing source.
Third, the expedited nature of decision-making involved in this process necessitates that a comprehensive due diligence on the target (and its relationship with the sponsor) to be undertaken. This will enable the underwriters to identify and mitigate any legal, financial, and reputational risks.
Finally, conflicts of interest (both actual and potential) need to be evaluated. This applies to both the target company and the SPAC itself. Such checks should cover whether the SPAC team has existing fiduciary obligations to other entities in the same industry, or perhaps even a pre-existing interest in the target company.
While standard practices for investigative due diligence are quite uniform throughout the industry for IPOs, they are less so in the SPAC and de-SPAC markets. When it comes to establishing the scope of diligence, underwriters have had to be flexible and inventive in order to balance the reduced deadlines and varied sets of risks that come with SPACs.
There will be many questions from retail investors about SPACs. Has the SGX and the Securities Investors Association (Singapore) put in place any initiatives to help with understanding SPACs?
SIAS provides independent research to retail investors to ensure that they are knowledgeable and are fully apprised of all the product features and risks of the SPACs, prior to investing in the same.
SIAS has committed to, appoint an independent research firm to provide research regarding the target company and the de-SPAC, after the target company has been identified. This research will provide guidance to investors on how to vote for the business combination.
Furthermore, SIAS has committed to reviewing all documents and disclosures of SPACs and to ask questions of the SPACs. SIAC will review the responses from the SPACs and provide a report commenting on responses from the SPACs.
What advantages are there for companies that would otherwise had looked to the US but now have an Asia option?
Sponsors are looking for a neutral platform for to list their SPACs. In particular, Chinese entities which were once mulling over listing SPACs in the US are now reticent to do so in light of the tensions between the US and China. As an Asian alternative, Singapore can be a viable venue for sponsors who do not wish, for political or economic reasons, to list in the US.
With respect to startups in Asia, many startups have been considered listing via a SPAC. However, due to the lack of an alternative at that point in time, Asian companies, such as Grab have proceeded to list in the US via a SPAC. Nevertheless, within the advent of the SGX SPAC framework, this situation would hopefully change with more startups in Asia listing on SGX.
What role do PIPEs play in SPAC transactions?
A private placement of shares in an existing publicly traded firm to a small group of authorised investors is known as a private investment in public equity (PIPE). PIPE agreements are common in SPAC transactions because the sponsors need to raise more money than they would get from their IPO in order to complete the purchase of firms that are viable for the SPAC’s objective. These potential businesses can occasionally cost more than the money in the SPAC sponsors’ trust account from public fund-raising.
PIPEs are used to acquire committed funding prior to the signing of a formal purchase agreement. Monies generated through PIPEs are typically necessary to secure the amount of cash required to fulfill the minimum cash condition at closure, as well as to complete the de-SPAC transaction and/or replenish funds paid out to SPAC shareholders who opt to redeem their shares.
PIPE investors have a role in confirming the target company’s value that is agreed in the de-SPAC transaction, in addition to contributing extra funding. The PIPE investors’ role is taken into account by the SGX which has stipulated in the SPAC framework that there is no need for an independent valuation of the target when a PIPE investment has been conducted.
Which sectors do you think would be of more interest to SPACs in Singapore? Have you already seen a pattern?
Generally, SPACs have a specific industry mandate, although being sector neutral; spanning across industrial, healthcare, consumer, energy, and technology sectors.
Nevertheless, industry watchers have observed that given the huge investor demand for tech businesses, SPACs primarily target high-growth tech companies.
In Singapore, there has been an uptick in inquiries from private equity/venture capital funds and startups. Although, there has not been a SPAC listing to date in Singapore, a trend can be gleaned out from the inquiries that have been coming in.
These inquiries reveal that private equity firms are seeking capital to make acquisitions. Reports of funds mulling a SPAC include Temasek- backed Vertex Ventures.
Startups are thinking of going the SPAC route for a number of reasons, these include the flexibility to negotiate favourable deal terms and to get listed on an expedited timeline.
