Quora Answer: What Can be Done to Promote SPAC Activity in Singapore?

The following is my answer to a Quora question: “What can be done to promote SPAC activity in Singapore?” 

SPACs, special purpose acquisition companies, are also known as “blank cheque companies”.  They are shell corporations listed on a stock exchange with the sole purpose of acquiring a private company.  This allows the acquired entity to bypass the strictures of the initial public offering process.  There are pros and cons to this. 

The obvious advantages of going public with a SPAC merger over an IPO  is the faster execution than an IPO.  A SPAC merger usually occurs within 3 to 6 months, on average, while an IPO usually takes 12 to 18 months.  SPACs also provide the possibility of raising additional capital.  A good SPAC will raise debt or private investment in public equity (PIPE) funding in addition to their original capital.  The intent is to not only fund the transaction but also to fuel growth for the merged company.  This backstop debt and equity are intended to ensure a that the transaction is completed, even if some SPAC investors exit, or partially exit. 

That being said, one of the main concerns of a SPAC merger is existing shareholding dilution.   SPAC sponsors usually own up to around 20% in the SPAC through founder shares, in addition to warrants to purchase more shares.  SPAC sponsors further benefit from an earnout component, which allows them to receive more shares when the stock price achieves a specified target, within a stipulated timeframe.  This, of course, leads to further dilution.  My personal concern about most SPACs is the possible shortfall in future capital, because SPACs want to all further rounds of funding to go through them.  Essentially, we are betting on the sponsors of the SPAC being able to monetise their network to the degree required by the company to raise funding.  The other concern of regulators is the narrower scope of financial diligence performed since a SPAC process does not require the rigorous due diligence of a traditional IPO.  In a traditional IPO, the underwriter ensures all regulatory requirements are met, but since a SPAC is already public, the target company does not have an underwriter.  This is a compliance concern. 

There is already increased SPAC activity in Singapore, and MAS has issued further compliance and regulatory guidelines.  I do not think we need to promote SPAC activity.  SPAC activity is already increasing as it is.  Whilst it has its benefits, I am quite sceptical of SPACs because of the more lenient reporting and underwriting required, which means there is risk that the SPAC may not perform, and investors will get burned.