SPACs - Special Purpose Acquisition Companies, also known as "blank cheque companies" is a method to list companies on a stock exchange. SPACs are shell companies with no actual commercial activities that are formed for the purpose of raising capital through an initial public offering (IPO) in order to acquire a private firm. Private companies can use SPACs to skip the regular IPO procedure where there are regulatory hurdles and go public faster. This is achieved by selling common stock, which is typically priced at $10 per share, as well as a warrant, which allows investors to purchase additional stock at a fixed price in the future. After the money have been raised, they will be held in a trust until one of two things occurs:
The management team of a SPAC, also known as sponsors, finds a company of interest, which will subsequently be brought public via acquisition using the IPO proceeds.
If the SPAC fails to combine or buy a company within a certain time frame, usually two years, the SPAC will be liquidated and investors will receive their money back.
OVERALL TREND IN ASEAN
A CNBC article in July stated that "more than 40 SPACs — or special purpose acquisition companies — are targeting the region, according to Vinnie Lauria, managing partner at early-stage venture capital firm Golden Gate Ventures."
Southeast Asia's start-ups raised a record $6 billion in the first quarter of the year, with logistics and courier service provider J&T Express raising over $2 billion. Carro, a Singapore-based start-up that operates an online marketplace mostly for pre-owned automobiles, received $360 million in new funding in June this year.
Golden Gate said in a report that in the next decade, the number of IPOs in Southeast Asia will exceed 300 in the next decade as more local start-ups aim to list in domestic public markets. The VC firm predicts an increase in medical technology start-ups, a significant rise in investment for the entertainment and media industry, and social commerce to dominate online transactions.
With new rules set to take effect on 3 September this year, the Singapore Exchange (SGX) will be the first major Asian exchange to enable SPAC listings. The regulations were finalized following a lengthy public consultation process between March 31 and April 28 that revealed widespread support for the exchange's framework. According to the exchange, over 80 people respondents commented, including financial institutions, investment banks, private equity and venture capital firms.
A listing under the SPAC framework must fulfil specific criteria, including a minimum capitalisation of $150 million. A de-SPAC must take place within 24 months following the IPO, with a 12-month extension permitted if certain requirements are met.
Ride-hailing giant Grab, a Singaporean MNC, announced in April this year that it would go public through a SPAC merger valued at $39.6 billion, one of the largest ever blank-check deals.
Another Singapore-based SPAC, Fat Projects Acquisition Corp, has filed to go public via Nasdaq in a US$100 million IPO (10,000,000 units at a price of US$10 per unit), consisting of one Class A ordinary share and one-half of one redeemable warrant, on the Nasdaq stock market, under the symbol "FATP". The company stated that it intends to focus on acquiring technology-driven companies in the areas of the supply chain, transportation, logistics, finance, sustainability, food, agriculture, e-commerce, Big Data, and companies that will leverage the rapidly growing middle class in Southeast Asia and their changing consumption and digital needs.
FATP recently hired Axel Winter, a respected Bangkok-based businessman, to its senior advisory board. Mr Winter is the chief digital officer for Siam Piwat and an outspoken supporter of Thailand's emerging digital economy. "For me what's important is a company that's strong, but wants to go to the next level and has a valuation above US$100 million," he said. "I'm very bullish on ASEAN and the Thai market for startups and see a lot of companies that just need another year to go to IPO."
The new Indonesian tech giant GoTo, which was formed by the US$18 billion mergers of Indonesia's ride-hailing behemoth Gojek and Tokopedia, is also set to go public in late 2021, in what is believed to be Indonesia's largest-ever IPO. GoTo is valued at between $30 billion and $40 billion on the stock market.
Vietnam has been highlighted as ASEAN's emerging star, with Golden Gate Ventures predicting that the nation would become the third-largest start-up ecosystem in Southeast Asia by 2022, with more regional venture capital firms committing to early-stage investments in the country.
Such good things come at a price and often fall under heavy criticism.
While private businesses may go public speedily without the volatility of a typical IPO, and investors can benefit from high-reward investments with low risk, SPAC has been criticized as a "shortcut" to the traditional IPO, avoiding many of the necessary strict regulatory requirements.
"SPACs should generally be avoided by retail investors because the SEC is unable to do its normal detailed company review of the IPO, as no operating company has even been identified at that point. As a result, investors would have no idea what they are buying. Invariably, many will suffer losses." - Dr. Howard M. Schilit, Founder and CEO Schilit Forensics, LLC and author of Financial Shenanigans
Additionally, due to the excess in SPACs, some of these "blank cheque companies" may be unable to secure a good acquisition target — or will overpay for a substandard business, therefore stiffing investors. Both Ashley MacNeill of Morgan Stanley and Paul Ryan, the Chairman of Executive Network Partnering Corp agree on this.
According to Ryan, the traditional SPAC model, in which founders receive a 25% interest in the company, generates mismatched incentives that might put regular investors off.
Matt Dmytryszyn, Director of Investments, Telemus, an RIA based in Southfield, Michigan, also shares the same sentiments. "Given the rapid rise in the number of SPACs there is a lot of capital competing for deals right now, so sponsors may feel the need to overpay in order to get the deal. To this point, we did a quick screen on Bloomberg of U.S. domiciled SPACs and found there are currently 593 SPACs listed. A year ago there were 161. So a significant increase in the number of SPACs. Not all of them are going to find good deals."
A SPAC's success or failure is often determined by the reputation of its sponsor, hence they are often sponsored by people with significant credentials and public profiles. This is a huge risk that the U.S. Securities and Exchange Commission (SEC) has warned: " It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment."