In the face of the pandemic, exchanges in the U.S. and Asia Pacific seem to be defying the odds. Listings on both sides of the world have pushed trading to record heights. High-tech, high-profile IPOs in the U.S. have netted $79.9 billion (bn) from January 1 to August 31, while similar Asia Pacific listings have earned $74 bn in the same period.1
The encouraging investment climate has also raised the profile for alternative M&A structures, piquing interest from companies seeking a shorter time frame and a more streamlined process. Between January and August 2020, 84 Special Purpose Acquisition Companies (SPACs) successfully listed in the U.S., raising over $30 bn in proceeds and twice exceeding the 2019 whole-year total.2
What is a SPAC?
A SPAC is a shell company, usually sponsored by an experienced business executive, that raises money from investors through an IPO. Regulations allow SPACs a limited time to acquire a private company. The target company goes public upon acquisition after a process called “de-SPACing.”3
A number of benefits make SPACs an attractive alternative compared to traditional IPOs:
- Immediate access to capital. Acquired companies gain access to more capital relative to an IPO and more freedom to use it. They can use the money raised by the SPAC to create immediate capital appreciation and value, or structure the transaction in ways no IPO would permit, like cashing out the existing owners.4
- Offers owners greater certainty of funding and closing. With an IPO, owners have little control over the size of the deal or the price of the shares. A SPAC allows owners to negotiate with the SPAC sponsor alone and exert a greater degree of control over the outcome.5
- Offers investors reduced risk. Under the U.S. SEC Rule 419,6 SPAC IPO funds are held in trust for the benefit of investors. Upon full disclosure of the target acquisition, disapproving stockholders can convert their SPAC holdings into their prorated share of the assets held in escrow.7 And if the acquisition is not completed within the specified time frame, the SPAC automatically liquidates and reimburses investors their prorated share of the assets.8
- Less time-consuming. SPACs offer an avenue to go public in a much shorter time frame, as they’re mandated to complete the acquisition within 18 to 36 months. SPAC acquisitions are also not beholden to the “IPO window” to maximize valuations.9
- More convenient listing requirements. Smaller companies that may not qualify for an IPO under current listing requirements may choose the SPAC avenue to raise cash without conducting their own IPO.10 On the investor side, SPAC IPO requirements are not as stringent as those required by regular IPOs.11
However, the SPAC’s enforced time limit can also be a disadvantage to sponsors and investors, as both have a deadline to identify a target company and complete the acquisition. Such a “do-or-die” mindset can increase the likelihood of concluding a less-than-optimal deal.
Worldwide SPAC Activity on the Rise
The U.S. accounts for the majority of ongoing SPAC activity. Given the restrictive or nonexistent regulations on SPACs in most Asia Pacific markets, knowledgeable Asian fund managers have instead taken to launching SPACs in the U.S. to target Asian acquisitions. Recent examples include:
- South Korean PE firm ACE Equity raised over $200 million in an IPO on NASDAQ. The ACE Convergence Acquisition SPAC is focused on targeting IT software and semiconductor software12
- China-based CITIC Capital raised $276 million with its SPAC IPO of CITIC Capital Acquisition Corp. on the New York Stock Exchange13
- Greencity Acquisition raised $40 million in an IPO on NASDAQ in July 2020. Greencity is an Asia-focused SPAC led by executives from SBI Financial China and Shanghai Midai Automobile.14
In China, domestic companies have driven the surge of China-targeted SPACs listing in the U.S. Such companies hope to use the process to increase international visibility and prestige, while obtaining liquidity out of China. U.S. SPACs see the large Chinese market as an almost unlimited area for growth.15
Malaysia and South Korea are the exceptions in Asia, as only these countries have SPAC-specific regulations in place.
In South Korea, SPACs are listed as public companies under KOSPI or KOSDAQ and must seal an M&A transaction within three years. In 2014, SPACs made up about 40% of new listings in the tech focused KOSDAQ,16 but concerns about conflicts of interest, tax and disclosure issues have hampered widespread adoption.17
In Malaysia, equity guidelines also give SPACs three years to complete an M&A transaction. The majority of SPACs in Malaysia focus on oil and gas companies, but almost none remain after a brief 2010 boom, with most SPACs either self-liquidating or converted into traditional listings.18
The Catch with SPACs
SPAC sponsors and target companies enjoy greater flexibility to choose the type of target, deal timing and terms of any future deal. SPAC investors, too, benefit from the instrument’s safeguard mechanisms that are commonly found in M&A deals.19
So, what are the potential risks or downsides in a SPAC IPO and acquisition?
Geopolitical risks. Ongoing tensions between China and the U.S. have increased scrutiny on cross-border M&A. U.S. agencies like the Public Company Accounting Oversight Board (PCAOB) and the SEC noted that local regulations limit the requirement for detailed financial reporting from China based companies, and the US government has tightened the rules in response.[i]
U.S. SPACs may face added difficulty with China-based target acquisitions. These companies may be penalized for noncompliance with new rules, including those set by the Committee on Foreign Investment in the United States (CFIUS)20 and the President’s Working Group on Financial Markets (PWG).21
Disclosure requirements. Compared to traditional IPOs, SPAC issuers do not undergo significant due diligence beforehand. Their acquisition targets are not “pre-identified”; nor any due diligence done on said targets.22
But companies acquired by a SPAC become public companies and must satisfy the relevant SEC filing requirements laid out in the Securities Act of 1933, Rule 419,23 the Securities Exchange Act of 1934, Rule 3a51-124 and section 11,25 and the 2002 Sarbanes-Oxley Act.
This includes all disclosures, earnings reports, audited financial statements and documented internal controls, all following the strict filing timelines set by the SEC with no compliance grace period.26
Given the limited resources and timetables available to a SPAC acquisition target, the latter may see the obvious benefit of working with an external and independent due diligence advisor.
These advisors can help not only to support research on target company, but subsequently to also help identify the potential risk factors of new business relationships, acquisitions and investments and help support compliance with anti-money laundering (AML), know your customer (KYC), Foreign Corrupt Practices Act (FCPA) and UK Bribery Act regulations.
Everybody involved in a SPAC acquisition lives on borrowed time; the two- to three-year timetable can be a double-edged sword for companies and SPAC sponsors working to conclude a deal. Finding a good fit with one’s partner—whether it’s a high-profile sponsor or a primed-for-growth target company—an experienced risk management partner may be all one needs to mitigate the risks and conclude a deal to everyone’s satisfaction, right on time.
1.Gopinath, Sweta and Balezou, Myriam. "U.S., Asia IPO Deluge Leaves Nascent Europe Revival in the Dust." Bloomberg. Bloomberg LLC, September 3, 2020. https://www.bloomberg.com/news/articles/2020-09-03/u-s-asia-ipo-deluge-leaves-nascent-europe-revival-in-the-dust.
2."Latest SPAC News." SPAC Research. SPAC Research, August 2020. https://www.spacresearch.com/?gclid=EAIaIQobChMIrufBgqKy6wIVmo3ICh09cArwEAAYAiAAEgL05_D_BwE.
3.Dinu, Raluca. "De-SPAC Process – Shareholder Approval, Founder Vote Requirements, and Redemption Offer." GigCapital. GigCapital, December 27, 2019. https://www.gigcapitalglobal.com/de-spac-process-shareholder-approval-founder-vote-requirements-and-redemption-offer/.
4.Heyman, Derek K. "From Blank Check to SPAC." Entrepreneurial Business Law Journal, vol. 2, no. 1, 531-552. Ohio State University, 2007. https://core.ac.uk/download/pdf/159610375.pdf.
5.Osipovich, Alexander. "Blank-Check Boom Gets Boost From Coronavirus." Wall Street Journal. Dow Jones & Company, July 13, 2020. https://www.wsj.com/articles/blank-check-boom-gets-boost-from-coronavirus-11594632601.
6."17 CFR § 230.419 - Offerings by blank check companies." Legal Information Institute. Cornell Law School, 2020. https://www.law.cornell.edu/cfr/text/17/230.419.
7.Jie Xiu and Daughney, Brian. "China Targeted M&A Re-Emerges in SPAC World." New York Law Journal. New York Law Journal, October 26, 2018. https://www.law.com/newyorklawjournal/2018/10/26/china-targeted-ma-re-emerges-in-spac-world/.
8."Regulatory Notice 08-54: Guidance on Special Purpose Acquisition Companies." FINRA. FINRA, 2020. https://www.finra.org/rules-guidance/notices/08-54.
9.Hawk, Rand. "Timing Your IPO — Market Windows." IPOhub. Brigham Young University, September 19, 2018. https://www.ipohub.org/timing-your-ipo-market-windows/.
10.Schumacher, Brandon. "A New Development in Private Equity: The Rise and Progression of Special Purpose Acquisition Companies in Europe and Asia." Northwestern Journal of International Law & Business. Northwestern University, 2020. https://scholarlycommons.law.northwestern.edu/njilb/vol40/iss3/4/.
11.Layne, Ramey et al. "Special Purpose Acquisition Companies: An Introduction." Harvard Law School Forum on Corporate Governance. Harvard Law School, July 6, 2018. https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-introduction/.
12.Nguyen Thi Bich. "S Korea's ACE Equity Partners plans $200m US IPO for blank check vehicle." DealStreetAsia. DealStreetAsia, July 10, 2020. https://www.dealstreetasia.com/stories/ace-equity-partners-us-ipo-196698/.
13."CITIC Capital Acquisition Corp. Completes $276 Million Initial Public Offering." PRNewsWire. PRNewswire, Feb 13, 2020. https://www.prnewswire.com/news-releases/citic-capital-acquisition-corp-completes-276-million-initial-public-offering-301005059.html.
14."Asia-focused SPAC Greencity Acquisition prices $40 million IPO at $10." Renaissance Capital. Renaissance Capital LLC, July 23, 2020. https://www.renaissancecapital.com/IPO-Center/News/69766/Asia-focused-SPAC-Greencity-Acquisition-prices-$40-million-IPO-at-$10.
15.Jie Xiu and Daughney, Brian. "China Targeted M&A Re-Emerges in SPAC World." New York Law Journal. New York Law Journal, October 26, 2018. https://www.law.com/newyorklawjournal/2018/10/26/china-targeted-ma-re-emerges-in-spac-world/.
16.디지털. "Local brokers rush to list SPACs on S. Korea's secondary bourse." Korea Herald. Herald Corporation, November 24, 2014. http://www.koreaherald.com/view.php?ud=20141124000761.
17.Lee, Soonghee. "Special purpose acquisition company." IFLR.com. Euromoney Institutional Investor PLC, March 1, 2010. https://www.iflr.com/article/b1lv131kcwp4pw/special-purpose-acquisition-company.
18.Loh, John. "Malaysian SPACs: Go hard or go home." GlobalCapital. Euromoney Institutional Investor PLC, March 1, 2016. https://www.globalcapital.com/article/wqq2hybkct4v/malaysian-spacs-go-hard-or-go-home.
19.Brewer, Preston. "Fortunes of SPAC, Traditional IPOs Diverge in Pandemic." Bloomberg Law Analysis. Bloomberg LLC, June 16, 2020. https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-fortunes-of-spac-traditional-ipos-diverge-in-pandemic.
[i].Duhnke, William D. "Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally—Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China." Public Company Accounting Oversight Board. Public Company Accounting Oversight Board, December 7, 2018. https://pcaobus.org/News/Speech/Pages/statement-vital-role-audit-quality-regulatory-access-audit-information-internationally.aspx.
20."Treasury Releases Final Regulations to Reform National Security Reviews for Certain Foreign Investments and Other Transactions in the United States." U.S. Department of the Treasury. U.S. Department of the Treasury, January 13, 2020. https://home.treasury.gov/news/press-releases/sm872.
21."President’s Working Group on Financial Markets Releases Report and Recommendations on Protecting Investors from Significant Risks from Chinese Companies." U.S. Department of the Treasury. U.S. Department of the Treasury, August 6, 2020. https://home.treasury.gov/news/press-releases/sm1086.
22."Regulatory Notice 08-54: Guidance on Special Purpose Acquisition Companies." FINRA. FINRA, 2020. https://www.finra.org/rules-guidance/notices/08-54.
23.Anthony, Laura. "Rule 419 and Offerings by Shell or Blank Check Companies." LawCast. Anthony LG PLLC, January 5, 2010. http://lawcast.com/2010/01/05/rule-419-and-offerings-by-shell-or-blank-check-companies/#:~:text=Rule%20419%20requires%20that%20the,for%20an%20acquisition%20or%20merger.
24."17 CFR § 240.3a51-1 - Definition of 'penny stock'." Legal Information Institute. Cornell Law School, 2020. https://www.law.cornell.edu/cfr/text/17/240.3a51-1.
25."15 U.S. Code § 78k - Trading by members of exchanges, brokers, and dealers." Legal Information Institute. Cornell Law School, 2020. https://www.law.cornell.edu/uscode/text/15/78k.
26.Wright, Chris and Soranno, Charles. "Rise of the SPACs: Understanding the Risks and Rewards in This Vogue IPO Vehicle." Protiviti. Protiviti Inc., June 5, 2020. https://blog.protiviti.com/2020/06/05/rise-of-the-spacs-understanding-the-risks-and-rewards-in-this-vogue-ipo-vehicle/.