There has been a lot of attention and chatter on SPACs lately here in Southeast Asia, especially after Grab announced their plans to list in New York through what seems to be the biggest SPAC merger in history.
Much of the talk is filled with scepticism – from questioning the methodology to citing SEC concerns. However, pundits in the region are often mixing things and confusing everyone even further. I also noticed that friends who are not exactly in the investment scene are often confused with all the noise.
Thought it would be useful to share some facts about SPACs (hmm, it actually rhymes). Let’s get started!
1. What is a SPAC?
This is straight forward: A Special Purpose Acquisition Company (SPAC) is a company that has no commercial operations – it’s a blank shell. It’s sole purpose is to raise capital through a traditional IPO and eventually merge with a private company that wants to go public.
2. How does a SPAC listing work?
An easy way to think about it, is that it’s a form of reverse IPO.
A traditional initial public offering (IPO) is the typical process a private company goes through to go public. The company needs to select and work with investment banks, meet all the requirements set by the Securities Exchange Commission (SEC), conduct roadshows to institutional investors, and determine the pricing. “A very gruelling process for the directors of the company”.
In a SPAC listing, the empty SPAC goes through the traditional IPO process first. As it has no operations, the process is much faster and cheaper. So when a private company like Grab comes along and wishes to go public, instead of going through the traditional IPO process, they simply just merge with the listed SPAC and take its position on the stock market.
However it’s important to note that SPAC listings are only a subset of reverse IPOs. As reverse IPOs also include mergers of private companies with public listed companies that have existing operations – like the Ezbuy and LightInTheBox merger. In a SPAC listing, the listed company is a shell.
3. SPAC is not a new kid on the block.
SPACs date back all the way to the 1990s, with the first SPAC reported to have been set up by David Nussbaum and David Miller. Nussbaum now runs EarlyBirdCapital, an investment bank specialising in SPACs.
You can read more about its history here.
4. SPACs have gained popularity in 2020, accelerating in 2021
Amid low interest and excess liquidity in the market, 2020 was a hot year for SPACs, with the number of SPAC IPOs increasing more than 4x from that of 2019. The SPAC train seems to be on full steam ahead. As of April 2021, the number of SPAC IPOs have already surpassed the total number of SPAC listings in the entire year of 2020.
However this runs the risk of an oversupply of SPACs, with not enough quality companies to merge with.
5. What’s a SPAC sponsor?
Sponsors are essentially the “founders” or pre-IPO investors of a SPAC. These sponsors provide the initial capital which is typically used to:
- Retain auditors, counsel, or advisors for the SPAC
- Fund the SPAC’s IPO
- Fund working capital needed to identify and diligence a private company to merge with
- Pay ongoing compliance and professional fees
Sponsors typically own 20% of the stock upon completion of IPO.
These sponsors are typically people or organisations who have extensive experience in the target industry and public market.
You’d probably recognize some well-known sponsors out there. Chamath Palihapitiya, well-known Venture Capitalist whose first SPAC was a merger with Virgin Galactic. Richard Li, whose SPAC approached Tokopedia for a merger deal (we wrote about his antics with Tokopedia even before the SPAC). And of course Altimeter Capital, in the Grab deal.
6. What other ways are there to go public?
Initial Public Offering (IPO)
As mentioned earlier, IPO is the most conventional way a private company can go public. It is an expensive and time consuming process as companies will need to do due diligence and pass stringent requirements by the SEC and public exchange of choice.
In layman’s terms, the whole process of an IPO is to create new shares, price them in a process called underwriting, and sell them to the public. Existing privately owned shares are then converted to public ownership and are worth the public trading price.
Some recent IPOs in 2021 include Bumble, Coursera, Zhihu among many others. You can check out the last 100 IPOs here.
Direct Listing
Another way that companies may choose to go public is through a direct listing.
In a direct listing, no new shares are issued and there is no underwriting process or intermediaries involved. It is simply the process of which existing owners of the private shares (Founders, investors, employees etc) sell it directly to the public.
It is a much cheaper alternative for a company to go public as there is no need to go through processes like underwriting which can cost a lot of money. However, the downside to listing this way is it comes with certain risks like no support and guarantee of share sale, no promotions, and no safe long-term investors among other risks.
Spotify and Slack are two notable companies that listed publicly through direct listing. Recently, cryptocurrency exchange platform Coinbase too went public through a direct listing.
7. What is the SEC concerned about?
The Securities Exchange Commission (SEC) did recently raise some concerns about SPAC mergers, specifically on the secretive nature of SPAC mergers and lofty earning projections made by SPAC sponsors.
The SEC recently announced an accounting guidance for SPACs to ensure clearer disclosures to the public.
However, amidst these concerns and increased regulation, John Coates, acting director of the SEC’s Division of Corporate Finance said, “Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst.”
8. How are shareholders protected?
SPACs have structurally changed over the years and have been increasingly regulated to protect the interests of public investors.
In the past, when a SPAC has decided on merging with a particular private company – the SPAC tells the shareholders in an NDA of the decision, and they will get to vote yes or no. These shareholders would then vote “yes”, if they wanted to keep their money in, and “no” if they wanted to cash out.
But in certain occasions, shareholders will team up and threaten to deliberately prevent a deal if they weren’t given extra advantages or preferential treatment.
Since then, regulators have separated the right to vote and the right to redeem one’s shares. That means you can redeem your shares regardless of your vote; which has since made most deals go through without (much) hassle.
9. Does it still matter after the merger is completed?
No. A SPAC is only a means for a company to go public, as with IPOs and direct listings.
What happens after the SPAC merger is entirely up to the underlying company.
10. There is more supply of SPACs than good companies in SEA.
A number of founders and CFOs of promising growth-stage startups in Southeast Asia we spoke to told us that they have been approached by 8-12 SPACs (and counting).
What this means is that there are definitely more SPACs than there are good companies here in the region – which ultimately gives good companies more negotiating power if they do decide to list through a SPAC.
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If there’s something you would like to find out about SPACs that we didn’t cover here, just drop us an email at [email protected] and we’ll try our best to help you navigate through this.
Featured image credit: Reuters/Edgar Su
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Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].
