SPACs in Singapore: striking the right balance between risk and opportunities

Singapore was among the first in Asia to introduce SPAC listings in its bourse, with a  regulatory framework implemented in September 2021. Private companies looking to take the plunge and go public will immensely benefit from evaluating the potential risks and rewards that come with SPAC transactions. Below, Rick Chan, Managing Partner and Head of Audit & Assurance in APAC and Ooi Chee Keong, Partner and Head of Capital Markets share their expert insights.

Q. What is a SPAC and what does this move mean for Singapore?

SPAC, is also known in the vernacular as a “Blank Check Company” with no prior operating history. The entity concept has come in and out of fashion since the 1990’s, depending on a number of factors including market liquidity and appetite for risk for new technologies.

Armed with a promising acquisition strategy, SPACs are established solely for the purpose of creating opportunities to raise capital for acquisition or combination of entities (“de-SPAC” transactions). SPACs are generally formed and financed by individuals or hedge funds, known as sponsors, who have expertise in management and deal advisory. Once the initial case is raised, SPACs have a set timeframe to identify a target company or companies to include in the SPAC and close the deal.

In the framework released by the Singapore Exchange (SGX), a SPAC listing must have the following key features:

• Minimum market capitalisation of S$150 million
• De-SPAC must take place within 24 months of IPO with an extension of up to 12 months subject to fulfilment of prescribed conditions
• Moratorium on sponsors’ shares from IPO through de-SPAC, followed by a six-month lock-up after de-SPAC and for applicable resulting issuers, an additional six-month moratorium on 50% of shareholdings thereafter
• Sponsors are required to subscribe to 2.5% to 3.5% of the IPO shares/units/warrants, depending on the SPAC’s market capitalisation
• De-SPAC may proceed if it is approved by more than 50% of independent directors and supported by more than 50% of shareholders
• Warrants issued to shareholders will be detachable, with dilution arising from the conversion of IPO warrants capped at a maximum of 50%
• All independent shareholders are entitled to redemption rights
• Sponsor promote is limited to up to 20% of issued shares at IPO

SPACs accounted for more than 50% of new publicly listed US companies last year.  and are expected to play a role in revitalising Singapore’s IPO market. This trend has been supported by the growing number of innovative nascent companies in Southeast Asia, particularly in sectors like tech and fintech.

While the explosive growth of SPACs presents itself as a viable alternative to the traditional Initial Public Offerings (IPOs), we need to carefully consider both the opportunities and risks that they pose to investors and companies alike. 

Q. What are the reasons behind SPAC’s spectacular rise?

Going public is a significant milestone for businesses and SPACs are increasingly gaining popularity for a number of reasons.

A key advantage is the speed of market entry. The process of taking private companies public via the SPAC route is significantly faster than the year-long IPO process. Heightened market volatility and political uncertainty have injected greater unpredictability into the market, so a shorter timeline is desirable to SPAC sponsors or private companies seeking large amounts of capital and liquidity. The financial benefits of raising capital are aplenty, from paying off debts and investing in new growth opportunities.

Against the backdrop of economic uncertainty and shifting regulatory expectations, the opportunities for growth in SPAC continue to proliferate, fuelled by seasoned sponsors and renewed investor interest. In the US, recent regulatory changes adopted by the US Securities and Exchange Commission (SEC) in early 2024 aimed to enhance investor protection and transparency in SPAC IPOs and de-SPAC transactions with increase disclosure, use of projections and issuer obligations. With stricter SEC disclosure rules, longer search periods, performance-based incentives and higher revenue thresholds for targets, the SPAC landscape is quietly making a comeback.

SPACs also provide greater certainty through an upfront price discovery. During market volatility period, timing the market remains a major concern for companies planning to make a traditional debut. Missing an IPO window by as little as one day can be disastrous.

Going public through SPAC structures offers target companies added assurance from investors right from the beginning. The alternative investment vehicle allows companies to negotiate an exact purchase price and better terms to maximise their valuation. A SPAC may also be willing to undertake a transaction with a company at an earlier stage than the usual IPO candidate.

Q. What are the risks we need to look out for?

Companies and investors need to be aware of the potential risks involved in SPACs in order to make informed decisions.

While the short timeframe is primarily viewed in a positive light, sponsors face pressure to target and acquire viable companies to meet their merger deadlines. Combined with minimal working capital, this situation may lead to further difficulties down the line.

Secondly, there is insecurity involved with valuing acquisition targets. Private companies are not obligated to report earnings and they may have bad financials due to cashflow issues. Price declines can also occur where the financial prospects and risks of the target companies are assessed inaccurately, leading to adverse results.

Another commonly underestimated challenge is the technical accounting and finance functions required in SPAC transactions. Some may find it a challenge to meet the extensive regulatory requirements under a condensed timeline. Similar to an IPO, companies need to prepare a business combination agreement and related ancillary documents. Going through a rigorous due diligence process is also critical to avoid any regulatory snags.

Q. How can we avoid the pitfalls of a SPAC transaction?

The reality is, not all SPACs are thriving and profitable. A recent Forbes article highlighted that many shortcomings in past SPAC deals stemmed from inexperienced sponsors and unrealistic valuations, rather than the SPACs structure itself. To mitigate these risks, investors should focus on evaluating the valuation of the company, research on the track record of the sponsors and use investor protections such as the redemption option. A Goldman Sachs study[1] indicated that numerous SPACS entities typically lag behind the broader market in the long run, particularly as rising interest rates weigh on growth-oriented valuations. Recent study also indicate that numerous SPACs generally underperform the broader market benchmarks and similar traditional IPOs, especially over extended holding periods.

Public listing transactions require broad expertise in project management, accounting, tax, internal controls and governance along with dedicated resources to plan, stage, and execute the SPAC efforts. In order to avoid potential pitfalls, building a quality advisory team is essential before embarking on this important journey.

Anticipation, expert advice and extensive planning is key to a successful public listing. At Forvis Mazars, our diverse team of specialist will provide practical and tailored advice to help you understand, secure, and manage their SPAC transactions. We offer a range of services related to capital markets, covering a wide spectrum of financing solutions to help our clients overcome an array of challenges.

We have considerable experience in advising companies on capital market transactions, including IPOs. Our dedicated capital markets team in Singapore is currently supporting clients with IPOs and more than 150 bond issuances. Our expertise enables us to provide you with specific insights on a broad range of issues related to market transactions.

The complexities involved in a SPAC transaction can be daunting, but Forvis Mazars will be with you every step of the way. We will help you navigate the rigorous merger process and comply with the listing requirements of SGX jurisdiction and market. Through our comprehensive advisory services, we will identify opportunities for organisational improvements to ensure a smooth and rewarding transition to public company life.

Conclusion

SPACs are set to emerge as a powerful force in the Singapore capital market. Understanding the key risks and opportunities that going public with this instrument brings is paramount to success.

Setting a clear strategic direction is essential to enabling businesses to achieve their objectives while enhancing long-term shareholder value, particularly as companies prepare for the future of audit in an increasingly complex public market environment. A comprehensive SPAC readiness assessment, supported by audit and assurance, helps reduce the complexities of entering the public markets and equips companies with the capabilities needed to support their growth and expansion plans.

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[1] Yun Li. “Goldman Sachs' Guide to the HOT SPAC Market and Why Investors Should Be Careful.” CNBC. CNBC, August 3, 2020. https://www.cnbc.com/2020/08/03/goldman-sachs-guide-to-the-hot-spac-market-and-why-investors-should-be-careful.html.