The Singapore Exchange (SGX) could have had about a decade’s worth of special purpose acquisition company (SPAC) listings. In 2010, the bourse operator was mulling whether it should allow such listings here. But as it turned out, SGX did not go through with it as the “conditions were not right” then, says Tan Boon Gin, CEO of Singapore Exchange Regulation (SGX RegCo).
Yet now that SPAC listings are booming in the US, the stock market regulator is rethinking its position. Tan says SGX RegCo has received enquiries from market participants on the structure. Having a slice of the action here could bring large companies to list on the local stock market, of which SGX has long desired. According to Refinitiv, US SPACs have raised $64.2 billion through IPOs so far this year, or 76% of the total equity raised by IPOs there.
To that end, SGX RegCo has put out a consultation paper to seek market feedback on whether SPACs should be introduced on SGX. The stock market regulator aims to seek a balanced approach that safeguards investors’ interests, while enabling an innovative way to meet the capital raising needs of the market.
A SPAC is essentially a shell company with no underlying business at the point of IPO. It raises proceeds for the sole purpose of acquiring a business after the IPO within a certain timeframe. Such a structure then allows other companies to be listed by getting acquired by a SPAC. This provides them with a quicker access to market and perhaps better valuations compared to the traditional IPO route.
However, these advantages come with certain risks that could be detrimental to shareholders. According to SGX RegCo, there may be freeriding by investors and excessive dilution of long-term investors. The SPAC may also rush to acquire a business, which the regulator terms as a “de-SPAC”.
Speaking to The Edge Singapore, Tan says SPAC listings are an “opportunity” for SGX, “but only if it’s done right”. In his observation of the US market, he points out that questions on whether tighter regulations are needed or are market forces sufficient to mitigate the risks are still open.
Similarly, SGX RegCo is attempting to address such questions here. “So, for us, we should be addressing these risks and asking all market participants the question whether for these particular risks, rather than just leaving it to market discipline, is it more appropriate for there to be some form of regulation? And if so, what should it be?” he says in an interview.
Among the key admission criteria suggested by SGX RegCo, SPACs are required to have a minimum market capitalisation of $300 million. Tan says this criterion is an attempt to “strike a middle ground” between facilitating the acquisition of a quality and sizeable target company and limiting the number of potential target companies to be acquired.
This criterion is also in line with SGX’s Mainboard rules on higher market capitalisation threshold, he notes, adding that a SPAC listing will only be allowed for the Mainboard. But he notes that there is no “magic number” for this requirement. “That is why we are consulting. We want to hear [feedback]. And that will inform the final number that we arrived at,” Tan says.
SGX RegCo has also recommended for SPACs to be given a three-year period from the IPO date to complete the acquisition of a target company. Such a transaction must comprise at least one principal core business with a fair market value forming at least 80% of the gross IPO proceeds in escrow. The resulting business combination will have to meet the initial Mainboard listing criteria.
Nevertheless, the requirement to meet the initial Mainboard listing criteria could likely impede the acquisitions of potential target companies. For one, Mainboard-listed companies are required to be profitable.
However, many growth companies, especially those operating in the technology, media and telecommunications sectors, are loss making despite other positive metrics. Ironically, this could defeat the purpose of allowing the listing of SPACs as Tan says this structure tends to attract such companies.
Tan explains that the spirit of this requirement is to prevent any lesser quality companies from listing through the “backdoor”. But he acknowledges that such a requirement could restrict the acquisitions of potential target companies, adding that he is open to feedback on the matter.
The consultation will be open until April 28.
