What is a SPAC listing: Things SG Entrepreneurs should note

SPAC: Many people have been busy discussing what is a SPAC from the point of view of the founder of a SPAC.  This article looks at this from the perspective of a business owner that wishes to merge with a SPAC or an investor that wishes to invest into a SPAC deal after a merger takes place. 

The market in 2021 is still hot for this asset class and lots of liquidity is being poured into this.

To save you time, we have highlighted the most salient key points you need to know about SPACs.

#1: What is a Special Purpose Acquisition Company

A Special Purpose Acquisition Company (SPAC) is a cash shell company set up to do acquisitions.  A SPAC is founded by industry professionals with strategic capital and they then list the cash shell usually with about   USD 100 million of cash in the shell and wait for potential target companies to acquire.  Most of such companies will list on the New York Stock Exchange (NYSE) or NASDAQ in the USA.

Why would a target company merge with a SPAC if the target company could do a public listing on its own you may ask?

• A SPAC is listed with hedge funds paying money into an escrow account so the SPAC is filled with cash and so by merging with this SPAC, the target company can go public in the US and skip the traditional underwriting process of an initial public offering (IPO) (where an investment bank goes to investors and ask them to subscribe for portions of the new listing and so is subject to situations whereby investors do not want to subscribe for pre-IPO shares or the investment banking firms not willing to back an IPO).

• A SPAC also can help partially solve the problem of pricing at the middle of the range rather than the top of the range.  For most IPOs, underwriting banks make money by buying from the company the listed shares at say 0.50 and then sell to pre-IPO investors for 0.60 and then list the shares say at 0.70. So the investment bank earns the underwriting spread between the price that they bought and the price they sold to pre-IPO investors.  By doing a married deal with a SPAC, the target company and avoid paying the underwriting spread and also price the IPO at the top of the targeted range.

• Some SPAC founders are also industry experts so by aligning capital with industry expertise, this means that the target companies gain much more than by choosing to list via an IPO themselves.

What are the disadvantages of doing a deal with a SPAC from a founder’s perspective:

• SPACs are dilutive to founders and as a founder you would expect to be diluted up to 50%, but in return you are merging with a company that is flush with cash and have a lot of hedge fund counterparties which means that if your company revenue numbers do well, your share price for your listed entity may actually rise really fast.

#2: Why have SPAC deals grown in popularity?

In 2020, SPACs have grown in popularity as there is excessive liquidity in the US markets arising from quantitative easing by the US Federal Reserve for COVID measures.  This excessive liquidity has flowed into the broader stock market and which continues to support the US stock market pricing too an all time high.

SPACs also allow late stage startup firms with a huge valuation but very little cash to merger with them.

#3: What are the best targets for such company acquisitions?

The owner of a SPAC is always looking for companies/sectors whereby after the completion of the acquisition the share price will tend to rise.  Startup firms in the live streaming space or even the firms in the Electric Vehicle space are looking at US listings currently and are quite popular choices.

Even ecommerce platforms with strong revenue multiples will also look for a US listing.

#4:  What should you do if you think you own a good target for a SPAC?

You should get in touch with a good legal team and investment banking team to help you find the best SPAC at the best price.  With the current oversupply of SPACs there will be many choices in the market if your company is a good target.

#5: Legal Issues when trading in SPAC shares?

You can only invest in SPACs after a deal between a target company and a SPAC is concluded.   The trick is to read the prospectus and figure out whether you think that on a combined basis whether the share price of the listed company will rise/fall after the merger.

Always engage a good law firm to help you read the fine print so that you can make an informed decision.

In conclusion, the current SPAC mania continues unabated in the market and we expect to see more SPAC deals looking for good South East Asian Target to acquire.  Do let us know if you would like to know more about this growing sector and we will be pleased to introduce you to our legal partner who can discuss with you more in this ever growing field.

Do leave comments below if you have any other questions about SPACs and we shall write more articles to answer some of your queries.

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