SGX introduces SPAC listing framework

4 September 2021

On 2 September 2021, Singapore Exchange (“SGX”) announced new rules that enable special purpose acquisition companies (“SPACs”) to list on the Mainboard of Singapore Exchange Securities Trading Limited (“Mainboard”) effective 3 September 2021.

SGX’s SPAC framework offers companies an alternative capital fund raising route with greater certainty on price and execution and further diversifies the investment products available to investors in our local capital markets, giving access to investments which would otherwise have been only available in the private equity space.

The framework takes into consideration the extensive feedback and interests of our market participants. Over 80 respondents provided feedback to SGX in what is possibly the highest response rate to an SGX consultation in recent times, illustrating the keen interest from market participants in this product. The framework also takes into account market practice and rules on SPACs in the United States (“US”), which is the most popular and established SPAC market. In so doing, SGX’s framework offers a credible alternative to US SPACs, while balancing the need to protect investors. 

Key commercial features of SGX’s SPAC framework

A SPAC is a company with no prior operating history, operating and revenue-generating business or asset at the point of its initial public offering (“IPO”), and which raises proceeds for the sole purpose of undertaking a business combination in accordance with the business strategy and acquisition mandate disclosed in the IPO prospectus.

This article focuses on the key commercial features of SGX’s SPAC framework. For further details on the framework, please refer to SGX’s Responses to Comments on Consultation Paper on SPACs, which was released on 2 September 2021.

1.   Minimum market capitalisation of S$150 million

In response to market feedback, SGX has reduced the minimum market capitalisation requirement for SPACs from S$300 million under its draft rules to S$150 million under the new rules. As such, a SPAC has to satisfy a quantitative admission criterion of a minimum market capitalisation of S$150 million, computed based on the IPO issue price and post-invitation issued share capital.

The S$150 million threshold is in line with the minimum market capitalisation criteria under SGX’s traditional IPO rules. It is also comparable to market capitalisation requirements for US SPACs. Taking into account that a business combination is typically at least three to eight times the initial SPAC size, SGX believes that the S$150 million threshold is sufficient to facilitate a quality and sizable business combination while not unduly limiting the potential target pool of businesses to acquire.

2.   At least 90% of gross proceeds in escrow account

Immediately upon IPO, the SPAC must place at least 90% of the gross proceeds raised from its IPO in an escrow account opened with, and operated by, an independent escrow agent which is a financial institution licensed and approved by the Monetary Authority of Singapore. This 90% threshold is in line with listing rules for SPACs in the US. The amount placed in the escrow account cannot be drawn down except for the purposes of the business combination, on liquidation of the SPAC or other specified circumstances. The SPAC (through the escrow agent) shall be allowed to invest the escrowed funds only in permitted investments in the form of cash or cash equivalent short-dated securities of at least A-2 rating (or an equivalent) until completion of a business combination.

3.   Sponsor’s promote limit of up to 20% of issued shares at IPO 

The sponsor’s promote refers to the sponsor’s entitlement to additional equity in a SPAC at nominal or no consideration in return for sponsoring the SPAC. After taking into account market research and market feedback, SGX has decided to impose a sponsor’s promote limit of up to 20% of the issued share capital of the SPAC (on a fully diluted basis) immediately following the closing of the IPO. SGX retains discretion in considering the appropriateness of the sponsor’s promote, while taking into account the overall structure of the SPAC.

This 20% threshold is consistent with market practice in the US, where the sponsor’s promote typically represents 20% of the SPAC’s IPO issued share capital.

4.   Business combination must take place within 24 months of IPO, with extension of up to 12 months subject to fulfilment of prescribed conditions

The general rule is that the SPAC must complete a business combination within 24 months from the date of its IPO. The 24-month timeframe is in line with US market practice, and will encourage SPACs to expeditiously secure suitable targets for the business combination.

The 24-month timeframe may be extended in the following ways:

• Automatic extension: Where the SPAC has entered into a legally binding agreement for a business combination before the end of the 24-month period, the SPAC shall have up to not more than 12 months from the relevant deadline to complete the business combination, subject to an overall maximum timeframe of 36 months from the date of IPO and provided that certain prescribed conditions are satisfied. The availability of this automatic extension will provide leeway for the SPAC to focus on due diligence and completion of the business combination without being subject to the uncertainty of having to obtain shareholders’ approval for the time extension (see below).
• Extension with approvals from SGX and shareholders: Where the SPAC has not entered into a binding agreement for the business combination by the end of the 24-month period and wishes to have more time to identify a suitable business combination, the SPAC must seek the respective approvals from SGX and shareholders, and demonstrate compelling reasons for a time extension of up to a maximum of 12 months. The threshold for shareholders’ approval would be a majority of at least 75% of the votes cast by shareholders at a general meeting to be convened. For the avoidance of doubt, the sponsor is not required to abstain from this vote.

5.   Moratorium on shares of sponsor and other key persons

Typically, under the traditional IPO rules, there is a 6-month moratorium from the time of IPO. In the case of an issuer which (i) has a minimum market capitalisation of S$300 million but is unable to meet the profits tests under the Mainboard Rules, (ii) is a mineral, oil and gas (“MOG”) company, or (iii) a life science company (each, a “Relevant Issuer”), there is a further 6-month moratorium for 50% of the original shareholdings.

In the case of a SPAC, there is a moratorium on the shares of the sponsor and other specified persons from IPO to the completion of the business combination, and a 6-month moratorium after the completion of the business combination. Following the business combination of a SPAC, where the resulting issuer is a Relevant Issuer, there is a further 6-month moratorium for 50% of the original shareholdings, in line with the traditional IPO rules. The following table summarises the moratorium periods applicable to the sponsor and other key persons involved in a SPAC:

	Moratorium from IPO to completion date of business combination	6-month moratorium following completion of business combination	Further 6-month moratorium thereafter on 50% of the original shareholdings
Type of issuer	All SPACs.	All resulting issuers.	A resulting issuer which: ·         has a minimum market capitalisation of S$300 million but is unable to meet the profits tests under the Mainboard Rules; ·         is an MOG company; or ·         is a life science company.
Applicable to all equity securities held by…	Sponsor, management team and their respective associates (collectively, “IPO Key Persons”).	·         IPO Key Persons; and ·         controlling shareholders and their associates, and executive directors of the issuer with an interest in at least 5% of the issued share capital (collectively, “BC Key Persons”).	BC Key Persons (same as previous column).

A SPAC, unlike a traditional IPO, involves a moratorium from IPO until the completion of the business combination. This aligns the interests of key persons involved in the IPO with the independent SPAC shareholders, as they will remain invested in the future growth and strategy of the SPAC. It also goes towards ensuring the quality of the sponsor and the business combination, as these key persons will participate in the business combination.

6.   Minimum equity participation by sponsor and management team

The SPAC’s sponsor and management team must, in aggregate, subscribe for a minimum value of equity securities which could take the form of shares and/or warrants (based on the subscription price at IPO) in accordance with the following requirements:

Market capitalisation of the SPAC (S$ million)	Proportion of subscription
150 ≤ M < 300	3.5%
300 ≤ M < 500	3.0%
M ≥ 500	2.5%

The requirement for minimum equity participation ensures that the sponsor and management team have skin in the game. This differs from other SPAC markets, and serves to strengthen alignment of the interests of the sponsor and management team with those of other investors in the SPAC. To allow flexibility, SGX has not prescribed the form and timing for how such persons will fulfil their equity participation.

7.   Approvals by >50% of independent directors and >50% of shareholders

The business combination must be respectively approved by a simple majority of independent directors, and an ordinary resolution passed by shareholders at a general meeting to be convened. After careful consideration of market feedback, SGX has refined the rules to permit all shareholders (including the sponsor, the management team and their respective associates) to vote on the business combination based on their respective holdings of the SPAC, but excluding the promote. Accordingly, for the purpose of voting on the business combination, the sponsor, the management team, and their associates, are not permitted to vote with shares acquired at nominal or no consideration prior to or at the SPAC’s IPO.

8.   Detachability of warrants, and maximum percentage dilution to shareholders arising from conversion of warrants issued at IPO capped at 50%

SGX’s SPAC framework allows the detachability of warrants, and hence the shares and warrants comprising the units of the SPAC are permitted to trade separately. The detachability of warrants, which mirrors the accepted position in the US, was a key point raised in feedback from market participants. An inherent feature of the SPAC structure, the detachability of warrants gives the asset class its commercial attractiveness. This feature serves as a risk premium that SPAC IPO investors enjoy in return for investing in the SPAC for up to 36 months, as the investors will have the flexibility to trade or retain the warrants, in hopes of potential upside when they subsequently exercise the warrants.

The maximum percentage dilution to shareholders arising from conversion of warrants issued at IPO is capped at 50% of the SPAC’s post-invitation issued share capital (including the sponsor’s promote). This threshold takes into account the typical warrant ratio based on US practices. The 50% dilution cap seeks to ensure the quality of the sponsor, as market discipline will play a role of check and balance in ensuring that the maximum percentage limit of dilution with respect to conversion of warrants is appropriate and acceptable to the market. Nevertheless, given the nascent stages of implementation of the SPAC framework, SGX will closely observe local developments and is prepared to consider a waiver on a case-by-case basis of the 50% dilution cap requirement where the SPAC can demonstrate sufficient bases.

9.   All independent shareholders entitled to redemption rights

SGX’s initial position under the draft rules on SPACs was only to allow shareholders which voted against the business combination to redeem their shares. However, taking into account feedback from market participants, including that the redemption rights are a fundamental attractive feature for SPACs and offer protection for investors, SGX has determined not to link redemption rights to shareholders’ voting decisions on the business combination.

This position mirrors the US SPAC framework, where investors may redeem their shares in the SPAC and receive a pro rata portion of the amount held in the escrow account, regardless of how they had voted in relation to the business combination.

10.   Pre-IPO investors’ participation in liquidation distribution

A SPAC may secure investments or funding from pre-IPO investors prior to its listing. Under SGX’s SPAC framework, the sponsor, the management team and their associates must waive their right to participate in the liquidation distribution in respect of all equity securities owned or acquired by them prior to or pursuant to the IPO.

As for other pre-IPO investors, SGX’s SPAC framework currently does not restrict them from participating in the liquidation distribution, as it recognises that pre-IPO investors (who are not founding shareholders, the management team nor their respective associates) bear the risk of making an early investment into the SPAC. As such, SGX currently does not intend to restrict such investors from participating in the liquidation distribution. This position is consistent with the practices of US stock exchanges. SGX will closely monitor the developments in this aspect and introduce targeted measures when necessary.

11.   Initial business combination to have a fair market value of at least 80% of the SPAC’s escrowed funds

The initial business or asset acquired pursuant to the business combination must have a fair market value of at least 80% of the amount in the escrow account at the time of entry into the binding agreement for the business combination, excluding any amount held in the escrow account representing deferred underwriting fees and any taxes payable on the income earned on the escrowed funds.

12.   Independent valuation not required when a PIPE investment is conducted

“PIPE” refers to private investment in public equity, where shares of a public company are sold in a private arrangement with selected investors or group of investors, typically institutional or accredited investors. Following market feedback and market engagement, SGX is persuaded that an independent valuation of the target is not necessary when a PIPE investment is conducted, given that PIPE investors act as an additional layer of check and balance. As such, under the amended rules, a competent and independent valuer need only be appointed to value the target businesses or assets in the following situations:

• a placement or subscription for the SPAC’s equity securities by institutional and/or accredited investors is not conducted contemporaneously with the business combination (i.e. a PIPE investment is absent); or
• the business combination involves MOG targets and/or property investment / development targets. This is consistent with the position for a traditional IPO on the SGX.

13.   Shareholding spread of 300 public shareholders

SGX has also reduced the shareholding spread requirement to 300 public shareholders, down from 500 public shareholders under the draft rules. Accordingly, at least 25% of the total number of issued shares of the SPAC (excluding treasury shares) must be held by at least 300 public shareholders.

14.   Flexibility in choice of jurisdiction of incorporation

SGX has removed the requirement for the SPAC to be incorporated in Singapore, in line with the majority of the respondents’ views and the approach taken by the US and other exchanges. In addition, SGX has clarified as part of the guidance on suitability assessment factors of a SPAC that it will consider the provisions in the SPAC’s articles of association and/or other constituent documents (including the comparability of shareholder protection and liquidation rights with that of Singapore-incorporated companies, and whether the SPAC will be subject to the Insolvency, Restructuring and Dissolution Act of Singapore (“IRDA”) for liquidation procedures or has incorporated such equivalent provisions of the IRDA).

Conclusion

The introduction of the SPAC framework is timely as it represents a further development of our capital markets and will enable a wider group of investors to invest in opportunities which would otherwise have been available only in the private equity space, such as new-economy and high-growth businesses. SGX’s SPAC framework provides a good balance between putting in place adequate safeguards for the protection of investors as well as promoting the competitiveness of our capital markets. 

Background materials

By way of background, SGX’s introduction of the SPAC framework follows a public consultation conducted by SGX from 31 March 2021 to 28 April 2021 on “Proposed Listing Framework for Special Purpose Acquisition Companies” (“Consultation”). SGX had sought public feedback, views and suggestions on the draft listing rules for SPACs. Our article on the Consultation may be found here.

SGX issued its Responses to Comments on Consultation Paper on SPACs on 2 September 2021, setting out its responses to feedback received as well as the new rules for the SPAC framework. SGX’s press release on the SPAC framework may be found here.