SGX consults on proposed listing framework for SPACs

9 April 2021

Singapore Exchange (“SGX”) issued a consultation paper on 31 March 2021 on a proposed regulatory framework for the listing of special purpose acquisition companies (“SPACs”) on the Mainboard of Singapore Exchange Securities Trading Limited (“Mainboard”) and is seeking market feedback on the proposals. The consultation closes on 28 April 2021.

The proposals seek a balanced regime that effectively safeguards investors’ interests against certain concerns posed by the unique features of SPACs, while meeting the capital raising needs of the market.

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

Admission and related criteria

SGX proposes the following admission criteria for SPACs:

• Minimum market capitalisation: A SPAC has to satisfy a quantitative admission criterion of a minimum market capitalisation of S$300 million, computed based on the IPO issue price and post-invitation issued share capital.
• Public float: At least 25% of a SPAC’s total number of issued shares excluding treasury shares must be held by at least 500 public shareholders at the time of the SPAC listing on the Mainboard.
• Minimum issue price: A minimum issue price of S$10 per share for the securities offered for the SPAC IPO, instead of the existing minimum issue price of S$0.50 for securities offered for a Mainboard listing.
• Jurisdiction of incorporation: A SPAC seeking a primary listing on the Mainboard must be incorporated in Singapore.
• Dual class share structure: A SPAC will not be permitted to adopt a dual class share (“DCS”) structure for its IPO.

Suitability assessment factors of a SPAC

SGX may, in its discretion, take into account any factor it considers relevant in assessing the suitability of a SPAC for listing. It is proposed that factors to be considered include the following:

• the profile including the track record and repute of the founding shareholders and experience and expertise of the management team of the SPAC;
• nature and extent of the management team’s compensation;
• extent of the founding shareholders and the management team’s equity ownership in the SPAC;
• alignment of interests of the founding shareholders and the management team with the interest of other shareholders;
• amount of time permitted for completion of the business combination prior to the liquidation distribution;
• dilutive features and events of the SPAC, including those which may impact shareholders and whether there are any mitigants for such dilution;
• the percentage of amount held in the escrow account that must be represented by the fair market value of the business combination; and
• such other factors as SGX believes are consistent with the goals of investor protection and the public interest.

SGX retains the discretion to consider any other factors it may deem relevant in its assessment on the suitability of the SPAC for listing.

The SPAC’s management team is expected to possess the appropriate experience and track record and demonstrate that it will be capable of identifying and evaluating acquisition targets, completing the business combination and managing the company sustainably based on the business objective and strategy disclosed in the prospectus.

The issue manager must demonstrate that the management team has the requisite collective experience and track record, which include having:

• sufficient and relevant technical and commercial experience and expertise;
• positive track record in relevant industry and business activities including specific contribution to business growth and performance, ability to manage relevant business operations risks, and ability to identify and develop acquisition opportunities; and
• positive corporate governance and regulatory compliance history.

Business combination requirements

• Timeframe for completion of business combination: The SPAC must complete a business combination within 36 months from the date of listing of its IPO. SPAC sponsors may voluntarily specify a shorter time frame to complete the business combination in the SPAC’s constitution. If the SPAC is unable to complete the business combination within the permitted time frame, it will be liquidated and the remaining funds (comprising a majority of the proceeds raised at IPO) held in the escrow account returned to shareholders. The SPAC may apply to SGX for an extension of time to complete the business combination and a special resolution must be passed by independent shareholders approving the extension. An extension is only permitted under exceptional circumstances and any such application must be made at least one month before expiry of the permitted timeframe. For the purpose of voting on the extension of time to complete the business combination, the founding shareholders, the management team, and their associates are not considered independent.
• IPO proceeds in escrow account: The SPAC will be required to place at least 90% of the gross proceeds from its IPO in an escrow account opened with and operated by an independent escrow agent which is part of a Monetary Authority of Singapore licensed/approved financial institution. The SPAC will be permitted to invest the escrowed funds in permitted investments. The issuer may draw down the amount placed in the escrow account prior to completion of a business combination in the following circumstances: (a) upon election by a shareholder to have its shares redeemed by the SPAC when voting against a proposed business combination and if the business combination is approved and completed within the permitted time frame; (b) upon a liquidation of the SPAC; (c) draw down of the interest earned and income derived from the amount placed in the escrow account as payment for administrative expenses incurred by the SPAC in connection with the IPO, general working capital expenses and related expenses for the purposes of identifying and completing a business combination; and (d) upon such other exceptional circumstances apart from those stipulated in (a) to (c). For a draw down under (d), the SPAC must obtain SGX’s approval, and at least 75% of the votes cast by independent shareholders at a general meeting to be convened.
• Fair market value of target company relative to amount in escrow account: The initial business or asset acquired pursuant to the business combination must have a fair market value of at least 80% of the amount held in the escrow account as at the time of the entry into the binding agreement for the business combination transaction. SPACs may consummate multiple concurrent acquisitions as part of the business combination. However there must be at least one initial acquisition which satisfies the requirement of having a fair market value constituting at least 80% of the amount held in the escrow account, and such concurrent transactions must be inter-conditional and completed simultaneously within the permitted time frame. Further, SGX proposes to require the appointment of a competent and independent valuer to value the businesses or assets to be acquired under the business combination, and for this independent valuation report to be appended to the circular to shareholders seeking their approval for the business combination (“Circular”).
• Minimum equity participation: The SPAC’s founding shareholders and the management team will be required to subscribe, in aggregate, for a minimum value of securities (at the IPO issue price) based on the following requirements:

• Moratorium period:
  • The founding shareholders, management team, controlling shareholders and their respective associates will be required to observe a moratorium on the transfer or disposal of all or part of their direct and indirect effective shareholding interest held in the SPAC as at the date of the SPAC’s listing until the completion of the business combination.
  • It is also proposed, following the completion of the business combination, for (a) the SPAC’s founding shareholders, the management team and their respective associates; and (b) the controlling shareholders of the resulting issuer and their associates, and the executive directors of the resulting issuer with an interest in 5% or more of the issued share capital of the resulting issuer, to observe a moratorium on the transfer or disposal of all or part of their direct and indirect effective shareholding interest held in the resulting issuer for at least six months from the date of the completion of the business combination. The Circular in relation to the business combination will be reviewed by SGX, and the SPAC and its financial adviser appointed to advise on the business combination must demonstrate to SGX the appropriateness of the proposed moratorium period to ensure alignment of interests of the aforementioned persons with that of other shareholders of the resulting issuer.
• Approvals for business combination: The business combination can only proceed with approval from (a) a simple majority of independent directors; and (b) an ordinary resolution passed by independent shareholders. For the purposes of voting on the business combination, the founding shareholders, the management team, and their respective associates will not be considered independent.

Protecting against dilution risks and other investor protection safeguards

• Redemption right: Independent shareholders (other than (i) the founding shareholders, the management team and their respective associates, and (ii) independent shareholders who vote for the business combination) voting against the business combination will be entitled to elect to redeem their ordinary shares and receive a pro rata portion of the amount held in the escrow account in cash, provided the business combination is approved and completed within the permitted time frame (“Redemption Right”). The redeemed shares will be cancelled and any accompanying warrants (if any) will become null and void. Independent shareholders who did not participate in the vote for the business combination will not be afforded the Redemption Right.
• Right to liquidation distribution: The SPAC will be liquidated if (i) it fails to complete a business combination within the permitted period; or (ii) prior to completion of a business combination, it fails to obtain specific independent shareholders’ approval regarding a material change which occurs in relation to the profile of the founding shareholders and/or the management team which may be critical to the successful founding of the SPAC and/or successful completion of the business combination (“Event of Material Change”). Upon liquidation, the funds in the escrow account (including any interest, income derived and deferred underwriting commission) will be distributed to all independent shareholders on a pro rata basis and to the founding shareholders, the management team, and their respective associates in respect of shares purchased after the SPAC’s IPO. The founding shareholders, the management team, and their respective associates, must waive their rights to participate in any liquidation distribution in respect of all equity securities owned or acquired prior or pursuant to the IPO.
• Mitigating dilution arising from convertible securities: Any warrants or other convertible securities (“convertible securities”) which may be issued with the SPAC shares at IPO will be non-detachable from the underlying ordinary shares and traded as a single unit on the Mainboard. Upon the exercise of the Redemption Right by dissenting shareholders of the business combination or upon liquidation of the SPAC, the convertible securities must not have an entitlement to the funds in the escrow account. This mitigates the potential significant dilutive impact to shareholders remaining with the resulting issuer and protects the economic value of shareholders’ investments. However, SGX notes that such a proposal would have a fundamental impact and present commercial drawbacks to the SPACs framework. As such, SGX also seeks feedback on an alternative option of requiring the SPAC to impose a maximum percentage cap on the resultant dilutive impact to shareholders post-business combination arising specifically from the conversion of issued convertible securities. This ensures mitigating measures are being taken to increase investor protection against significant dilutive impact arising from conversion of convertible securities issued by the SPAC with the ordinary shares at IPO.
• Event of Material Change occurring prior to completion of business combination: The SPAC must put in place a liquidation mechanism under which the occurrence of an Event of Material Change triggers a liquidation event for the SPAC, where cash distributions equal to the shareholders’ share of the amount in the escrow account at the time of the liquidation distribution will be returned to the shareholders (“Liquidation Mechanism”) on a pro rata basis as soon as practicable, as permissible by the relevant laws and regulations. If an Event of Material Change occurs, the SPAC must obtain approval of a majority of at least 75% of the votes cast by the independent shareholders at a general meeting to be convened for the continued listing of the SPAC. Instances of an Event of Material Change include a change in control of the founding shareholders, and the resignation and/or replacement of key members of the SPAC’s management team which are not due to natural cessation events such as death or illness. As the Event of Material Change is not exhaustive, SGX will have the discretion to determine if an Event of Material Change has arisen.
• Limit on sponsor’s promote: SGX is proposing not to impose a limitation on the quantum of the sponsor’s promote (i.e. the entitlement to additional equity securities in the SPAC at nominal or no consideration in return for sponsoring a SPAC) in view of other safeguards proposed to align the interests of independent shareholders and with the founding shareholders and the management team of the SPAC.
• Resulting issuer to meet initial listing requirements: It is proposed to require the resulting issuer upon the successful completion of a business combination to meet the applicable initial listing requirements under the Mainboard Rules, including the quantitative admission criterion, public spread and distribution requirements, and qualitative requirements such as the character and integrity of directors, executive officers and controlling shareholders. If the resulting issuer does not meet the initial listing requirements, the securities of the SPAC will be delisted. Where the resulting issuer adopts a DCS structure, the SGX DCS framework will apply. These companies would also be required to satisfy the initial listing requirements for non-profitable companies.
• Requirement to appoint a financial adviser for the business combination: It is proposed to require the SPAC to appoint a financial adviser, who is an issue manager, to advise the SPAC on the business combination. The financial adviser will be required to provide a responsibility statement in the Circular accepting responsibility for the disclosures in the Circular relating to the business combination transaction.
• Full and true disclosures in the Circular relating to business combination: SGX proposes to require a responsibility statement from the SPAC’s founding shareholders and directors, the proposed directors of the resulting issuer, and the financial adviser, with respect to the information contained in the Circular pertaining to the business combination and target businesses and/or assets. This will help ensure that independent shareholders are provided with full and true disclosure to vote on the business combination. SGX also proposes to require that the Circular on the business combination complies with the prospectus disclosure requirements under the Securities and Futures Act, and include disclosures on key areas such as (1) the financial position and operating control of the resulting issuer, (2) the character and integrity of the incoming directors and management of the resulting issuer, (3) the compliance history of the resulting issuer, (4) the resulting issuer’s possession of material licences, permits and approvals required to operate the business, and (5) the resolution and mitigation of conflicts of interests.

Reference materials

The following materials are available on the SGX website www.sgx.com:

• Press release: SGX consults on SPACs listing framework
  
• Consultation Paper on Proposed Listing Framework for SPACs
  
• Template for Response to Consultation Paper on Proposed Listing Framework for SPACs