SPACs in Singapore: Game changer or reckless craze?

INVESTORS faced what was arguably the largest economic recession since the 1930s following the impact of Covid-19 in 2020. However, in an investment climate still awash with liquidity, the past year also saw a growing interest in special purpose acquisition companies (SPACs).

Amid such high levels of liquidity and persistently low interest rates, a growing number of investors, many with robust appetites for higher-yielding investment opportunities, have fuelled the rising interest in SPACs. This is reflected in the record amount of capital raised and number of SPAC initial public offerings (IPOs) globally.

While the craze for SPACs has been centred in the US, this interest in SPACs (or "blank cheque companies") now appears to be shifting towards Asia, with opportunities to invest in Chinese technology companies such as drone-maker DJI and ByteDance, the creator of Tik Tok, as well as South-east Asian unlisted unicorns such as Grab and Gojek.

It was recently reported that Traveloka, South-east Asia's largest online travel startup, is eyeing a SPAC listing in the US, as is a company backed by Hong Kong's richest man, Li Ka-shing. Further evidence of SPACs gaining traction in Asia can be seen in the SPAC IPOs filed by Singapore-based Vickers Venture Partners, Hong Kong-based Provident Acquisition and Japan-based Softbank.

Amid such growing interest, the Singapore Exchange (SGX) has also announced that it will be launching a public consultation exercise with industry players soon to consider allowing SPACs to list in Singapore, possibly as early as this year.

For Singapore to realise its potential as the regional hub for SPACs, regulators must ensure that safeguards are in place to mitigate the inherent dangers in SPACs without curtailing the benefits of a SPAC IPO.

DIFFERENT PROCESS, UNIQUE BENEFITS

Possible benefits of a SPAC IPO include:

(i) the ability to bypass requirements of traditional IPOs such as having the need for a financial or operating track record;

(ii) avoiding the uncertainty in the pricing process typical of a traditional IPO (traditional IPOs have been estimated to be under-priced on average by 10 per cent to 20 per cent in the US);

(iii) generally being less expensive (there is no need to pay underwriting fees in a SPAC IPO) and time-consuming than a traditional IPO; and

(iv) being able to leverage the management expertise of an experienced sponsor to help the private/target company grow its business.

As for investors, a SPAC would present an opportunity to participate in a private-equity type of investment via a publicly-traded security. Unlike for most private equity participations, the investors of a SPAC need not be accredited investors.

SAFEGUARDS FOR INVESTORS

SPACs had previously been considered by the SGX in 2010, but the appetite for such an alternative to traditional IPOs then was not strong enough among potential listing aspirants and investors.

Fast forward to a decade later, listing SPACs on the local exchange amid surging interest in SPACs globally might give SGX an edge over its rival exchanges in the region and may potentially allow Singapore to be the Asian hub for SPACs.

While the listing of SPACs is a promising growth option for the local bourse and will provide an additional investment alternative for investors in the region, there are some inherent dangers which need to be carefully considered. SPACs have often been criticised for lacking transparency and providing greater returns for sponsors than for investors.

Given that there is little financial information, no clear business plan or operating track record for investors to rely on, SPACs will essentially have to be exempted from the requirement to comply with the information and disclosure obligations laid down by the Securities and Futures Act (Chapter 289) (the SFA), in particular, those set out in the 5th Schedule of the Securities and Futures (Offers of Investments) (Securities and Securities-based Derivatives Contracts) Regulations 2018, which contain the main disclosure requirements for a traditional IPO prospectus.

One way to partially deal with this lack of information may be to adopt a SPAC-specific list of disclosure requirements for SPACs looking to list on SGX, which should, at a minimum, require the SPAC to stipulate in its prospectus the following:

(i) parameters on the use of proceeds by the SPAC;

(ii) qualitative and quantitative requirements in considering target businesses for acquisition;

(iii) clear timelines to make an acquisition of a target business; and

(iv) unequivocal information on the exit mechanisms for investors should the SPAC fail to make an acquisition within a fixed time period.

The concept of a SPAC may also be likened to that of a collective investment scheme (CIS), which is regulated under the SFA. Given that a SPAC may be an arrangement where investors' contributions are pooled, and the purported purpose or effect of the arrangement is to enable participants to participate in or receive profits/income arising from property acquired, similarities to a CIS can be drawn. If so, unless an exemption is granted by the Monetary Authority of Singapore (MAS), the regime governing CIS may be applicable, including the need for authorisation or recognition as a CIS by the MAS and the need to prepare a prospectus containing information required of a CIS as prescribed by the SFA.

As a SPAC has no assets, products or track record to start with, investors are essentially looking at the sponsors for assurance. In the US, some SPACs are hugely successful with high-profile sponsors such as Bill Ackman and former Facebook executive Chamath Palihapitiya being onboard.

A potential safeguard against abuse of the SPAC vehicle would be to set out requirements ensuring that only qualified sponsors can promote a SPAC and such persons should be subject to careful scrutiny by the SGX.

A possible measure for qualified sponsors or promoters might be that only persons with relevant experience, track record, and are of "good fame and character" (akin to the requirements for directors and key executives for companies listed on the Australian Stock Exchange) may qualify as sponsors or promoters.

Albeit being vastly different to traditional IPOs, SPACs should only in limited circumstances be exempted from the SGX Listing Rules.

For example, to safeguard against potential abuse from self-dealing, sponsors deciding to merge the SPAC with private companies which they control or have an interest in should be subject to Chapter 9 of the SGX Listing Rules which sets out the requirements for Interested Person Transactions.

Given that the merger with the target business is likely to be in the form of a major acquisition, Chapter 10 of the SGX Listing Rules, which governs, among other things, major acquisitions, should also be applicable for SPACs to ensure that the safeguards and disclosure requirements therein are applicable to such acquisitions by a SPAC, with some modifications.

This will go towards ensuring that investors in SPACs have the necessary information and opportunity to decide whether the SPAC should or should not go ahead with the acquisition of a particular target business, and not simply give free rein to the management group of the SPAC to decide.

As with all listed companies, good corporate governance is fundamental to the success of the business. SPACs should therefore be required to generally adhere to the Code of Corporate Governance.

It is imperative that there be a strong audit committee in place, perhaps tasked with oversight over any use of funds raised from the SPAC IPO. It may also be advisable for SPACs to implement internal policies which require multi-layered approvals, depending on the proportion of the SPAC's funds sought to be utilised.

BOON OR BANE?

Technology has driven profound changes in our lifestyle as well as consumer and investment behaviours, driving the rapid rise of new innovative companies such as electric vehicle maker Tesla, consumer Internet company SEA and crypto exchange Coinbase.

Traditional business growth models have also been flipped on their heads, with inorganic growth backed by big money being the path taken by many companies to capture market share and kill off the competition. SPACs appear to fit perfectly into this narrative and are a sign of our times.

However, there may also be indirect costs to an investor investing in SPACs, such as the dilutive effect as a result of rewarding the sponsor with up to 20 per cent of the SPAC's shares for successfully finding and acquiring a target business. Many of the existing SPACs have been structured in this way.

Since there is no business to bet on, investors are essentially betting on the person or people behind the SPAC. The success of a SPAC may well boil down to the reputation and track record of the sponsor(s).

As with any investment, investors should perform their own due diligence on the sponsor(s) and the business proposition being put forward before taking the plunge, if and when this new 'blind pool' (as it's also been known to be called) investment vehicle becomes available on our shores.

With appropriate safeguards in place, backed by Singapore's reputation as a trusted financial services jurisdiction, SPACs may become a viable alternative to traditional IPOs for fund raising in Singapore and the region.

• Tan Chong Huat is senior partner at RHTLaw Asia LLP and non-executive chairman of RHT Group of Companies. Yang Eu Jin is partner and co-head of corporate & capital markets practice at RHTLaw Asia LLP