Piyush Soni

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SPACs in the USA

Amongst various countries around the world, the USA has the most appropriate regime to regulate the SPACs. It has the largest operating SPACs, both by number and volume. USA securities regulator Securities and Exchange Commission (SEC) explains SPAC as follows: “Unlike an operating company that becomes public through a traditional IPO, however, a SPAC is a shell company when it becomes public.  This means that it does not have an underlying operating business and does not have assets other than cash and limited investments, including the proceeds from the IPO.”[1]

SPACs in the USA have to file the following documents: 

1. Form S-1 – A registration statement with the SEC at the time of the IPO
2. Form B423 – Final prospectus
3. Form 10-Q – Statement to disclose the amount of the fund raised immediately after the IPO.
4. Form S-4 – Filed, after entering into an agreement with the target company but before shareholders’ approval, with the SEC for approval
5. Form 8-K – It must contain all the information that would be required in a Form 10 registration statement (the registration statement for companies that become public reporting companies other than through a registered IPO).

Since the companies acquired by SPAC become public companies, they are now obliged to fulfill relevant SEC requirements including the Securities Act of 1933, Rule 419, Rule 3a51-124, and the Sarbanes-Oxley Act, 2002. 

Financial Industry Regulatory Authority (FINRA) via Regulatory Notice 08-54 has issued Guidance on Special Purpose Acquisition Companies. Similarly, the Division of Corporation Finance of the Securities and Exchange Commission of the USA came up with guidance concerning SPACs.

The sponsors may have contractual obligations with other entities, either in their capacity as an investor or otherwise, which may create a conflict of interest to acquire a business. FINRA Rule 5121 is attracted to address this issue, which requires disclosure of the nature of the conflict of interest and certain other compliances. Once the acquisition stage is reached, all possible incentives and conflicts that the sponsor of a SPAC may face must be disclosed.

Further, the IPO proceeds are held in an escrow account in trust till a target is identified for acquisition. [2] The money lying in the escrow account is invested in money market funds or short-term U.S. government securities till a public announcement for target acquisition is made. [3]

Once a target is identified, the shareholders are required to approve the acquisition. The investors who do not approve acquisition are entitled to receive the money they had invested. [4] However, the sponsors are prohibited from selling their holding in the SPAC before completing an acquisition. [5]

SPACs in the United Kingdom (UK)

In the UK, the most common listing venue to list a SPAC is by way of a standard listing on the Main Market. Notwithstanding the added administrative and cost burden involved in producing a prospectus (and having it approved by the UKLA), and the requirement for 25% of its shares to be held in public hands (being independent shareholders each holding 5% or less), a standard listing on the Main Market of the London Stock Exchange has become the favored listing venue for SPACs.[6] This is because the SPAC does not require shareholder approval to make its acquisition (provided of course that such acquisition is within its investment strategy).[7]

A common complaint about London-listed SPACs is that trading gets suspended once a merger is announced.[8] The reverse takeover rules prevent trading from resuming until a deal prospectus is published, a requirement that has no specified deadline, so investors who want to sell their shares can find themselves locked in.[9] However, the Financial Conduct Authority has said that it is proposing to ease its rule regarding the suspension of trade.[10] The FCA has also proposed to begin a four-week consultation aiming to implement new rules by early summer.[11]

SPACs in Malaysia

The Securities Commission Malaysia (SCM) on 23^rd December 2020 issued Equity Guidelines which contained the framework for regulating the securities. The guidelines were issued to ensure that new submissions of SPACs in Malaysia are of high quality, and at the same time protection of public investors was kept in mind. The guidance note defines a SPAC as “a corporation which has no operations or income generating business at the point of an initial public offering and has yet to complete a qualifying acquisition with the proceeds of such offering.”[12] The guideline broadly covers the following:

1. Equity offering and the primary listing of a SPAC on Bursa Securities;
2. Qualifying acquisition by a SPAC; and
3. Liquidation distribution upon failure by a SPAC to meet the time frame for a qualifying acquisition [13].

The guidelines also provide to consider the suitability of a SPAC on a case-to-case basis after considering factors like experience and track record of the management team, nature and extent of the management team’s compensation, the extent of the management team’s ownership in the SPAC, amount of time permitted for completion of the qualifying acquisition before the mandatory dissolution of the SPAC, Percentage of the amount held in the trust account that must be represented by the fair market value of the qualifying acquisition, Percentage of proceeds from the initial public offering that is placed in the trust account, etc.[14] The guidelines also place a minimum cap of RM150 million on fundraising by SPACs through its initial public offering.[15]

SPACs in Canada

In Canada, SPACs are regulated through separate guidelines issued by Toronto Stock Exchange (‘TSX’). The guidelines define SPACs as “A SPAC is a publicly-traded shell corporation that has no operating business (current or previous) that must use the money raised from its initial public offering (“IPO”) to finance an acquisition of an operating business.” [16] SPACs typically have the following characteristics:

1. At least 90% of the proceeds from the SPAC’s IPO is set aside and invested in liquid and low-risk securities(the “Escrowed Funds”);
2. A meeting of shareholders must be held to approve any proposed acquisition;
3. If a non-founder shareholder votes against a proposed acquisition, they have the right to receive their pro-rata share of the Escrowed Funds; and
4. If an acquisition is not completed within the defined time frame (typically two to three years), shareholders have the right to receive their pro-rata share of the Escrowed Funds (excluding any shares held by the founders of the SPAC).

The guidelines also provide that the listing application, preliminary prospectus, draft escrow agreement governing the IPO proceeds, and personal information forms for all insiders of the SPAC should be filed with the Exchange concurrently with the filing of the preliminary prospectus with the applicable Canadian securities regulatory authorities. A minimum of $30 million shall be raised from at least 300 public shareholders via IPO with a minimum price of $2.00 per share or unit. [17] However, SPACs are free to issue either common shares or units (consisting of a common share and up to two warrants).

SPACs in Singapore

The Singapore Stock Exchange (‘SGX’) issued a consultation paper titled ‘Proposed Listing Framework for Special Purpose Acquisition Companies’[18] on 31^st March 2021 which among other things provide for the following:

1. A minimum S$300 million market capitalization and at least 25% of the total number of issued shares to be held by at least 500 public shareholders at IPO.

A minimum IPO price of S$10 a share. 

1. At least 90% of IPO proceeds are placed in escrow pending the acquisition of a target company (known as the business combination). Cash will be returned on a pro-rata basis from the amount in escrow to any shareholder voting against the business combination or upon the liquidation of the SPAC.
2. Any warrant (or other convertible securities) issued with the ordinary shares of the SPAC at IPO must be non-detachable from the underlying ordinary shares of the SPAC for trading on SGX.

The paper also suggests that the founding shareholders and/or the management team must hold minimum equity at IPO of 1.5% to 3.3%, depending on the SPAC market capitalization.[19]

REGULATORY CHALLENGES FOR SPACs IN INDIA

The current regulatory framework in India is not conducive to the SPAC structure. In the Indian markets, companies aspiring to go public need to cross several regulatory hurdles. These regulations include SEBI Regulations, requirements under the Companies Act, and Stock exchange regulations amongst others.

SEBI REGULATIONS

For a company to get listed through an IPO it needs to qualify the eligibility criteria under SEBI (LODR) Regulations. Regulation 6 of SEBI (ICDR) Regulations [20] lays down the eligibility requirements for an Initial Public Offer (IPO) and requires:

1. A company to have net tangible assets of at least ₹3 crores in the preceding three years,
2. Minimum average consolidated pre-tax operating profits of ₹15 crores during any three of last five years and 
3. The net worth of at least ₹1 crore in each of the last three years.

The absence of operational profits, net tangible assets would prevent SPACs from making an IPO through this route. However, entities not satisfying the main listing criteria as specified above may seek listing upon compliance of the alternate listing norms specified under the mandate of regulation 32(2) read with regulation 6(2), the entity shall have to ensure that not more than 10% and 15% allocation is made to retail individual investors and non-institutional investors respectively. In other words, at least 75% of the net offer shall be allocated to qualified institutional buyers and the public offer should be made through the book-building process. [21]This can be one such way to raise money; however, there are several other challenges that SPACs need to encounter. 

For now, Indian regulators have not prescribed a regulatory framework for SPACs. However, the Securities and Exchange Board of India (SEBI) has instituted a committee of experts to examine the feasibility of bringing regulations for SPACs in India, which may conceivably expand the possibilities of domestic listing of start-ups. [22]

COMPANIES ACT REGULATIONS

Commencement of operation

1. SPACs typically take 18-24 months to identify a target, perform due diligence and then merge with the target entity. [23] However, Section 248 of the Companies Act 2013 authorizes the Registrar of Companies to strike off the name of companies that do not commence operation within one year of incorporation. Hence, this provision is another impediment in paving the way for the SPAC regime in India. Therefore, if SPACs are to be made functional in India, enabling provisions will have to be inserted in the Companies Act.[24]

MOA of the company

2. As per section 4(1)(c) of the Companies Act, 2013, the memorandum of the company shall state the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof. [25] However, SPACs do not have a business objective of their own and their main aim is to acquire a target. The Companies Act, 2013 has also taken away the flexibility in defining the objects of the company by removing the ‘other objects’ clause. [26]

LISTING REQUIREMENTS OF STOCK EXCHANGES

The guidelines of BSE and NSE, inter alia, require compliance with the Companies Act and SEBI Regulations. However, we have already discussed above that currently, SPACs are incompatible with SEBI regulations and the Companies Act. Under these guidelines, companies are also required to submit the financial statements of the past three years.[27] But, the SPAC is a newly formulated entity and doesn’t have any past track record. Hence, the stock exchange regulations are another impediment in listing a SPAC.

RECENT TRENDS OF SPACs IN INDIA AND THEIR PROSPECTS

Recently, SPACs have gained attention with giants like ReNew Power[28] and Grofers [29] eyeing SPAC mode to enter NASDAQ. Earlier, Videocon d2h got listed on the NASDAQ via a SPAC called Silver Eagle Acquisition Corporation.[30] The Ministry of Finance had allowed unlisted Indian companies to list depository receipts offshore without domestic listing.[31] Using the same, Silver Eagle identified Videocon as a lucrative acquisition target and dispersed its ADS and warrants to its approving shareholders, took it public on NASDAQ, and thereafter, dissolved itself, having achieved its purpose.[32] Indian privates like Solar Semiconductor [33], and Yatra [34] were also similarly acquired by NASDAQ-listed SPACs in 2008 and 2014 respectively.

RECOMMENDATIONS FOR A PROSPECTIVE REGIME OF SPACs IN INDIA

As has already been discussed, the current legal framework poses several regulatory impediments before SPACs to get functional in India. Hence, in the end, the author would like to explore some regulatory changes, which if inculcated could pave the way for SPACs in India. To build a prospective regime for SPACs in India, the regulations must strike a balance between investor protection and broadening the scope of Indian capital markets to raise funds.

As SPACs are different from the companies that undergo traditional IPOs, the author suggests that there is a need for SPAC-specific laws. Publicly listed companies need to comply with the Companies Act provisions and SEBI Regulations; hence a new chapter dedicated to SPACs should be added in the Companies Act which may contain provisions ranging from incorporation, management, and other provisions governing the rights and duties of shareholders and the board members of the company. In the same way, the provisions in all other applicable laws need to be amended accordingly. Further, the Income-tax laws should permit exemptions for SPACs which are currently permitted to Startups, Venture capitalists, and Angel investors.[35]

References

¹ “What You Need to Know About SPACs – Investor Bulletin”, (10-12-2020) <https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin> (last accessed on 17-04-2021).

² Securities Exchange Act, 1933, Rule 419 (    USA).

³ Ibid 

⁴ Supra note 1.

⁵ Ibid 

⁶ Paul Amiss, “SPAC to the Future: The Recent Resurgence of UK SPACS and Latest Trends”, (11-04-2018) <https://www.winston.com/images/content/1/4/v3/142888/SPAC-to-the-Future-the-Recent-Resurgence-of-UK-SPACs-and-Latest.pdf> (last accessed on 16-04-2021).

⁷ Ibid 

⁸ Ryan Browne, “London Stock Exchange boss sounds the alarm on SPAC ‘froth’”, (05-03-2021), <https://www.cnbc.com/2021/03/05/london-stock-exchange-boss-sounds-the-alarm-on-spac-froth.html> (last accessed on 17-04-2021).

⁹ Phillip Stafford, George Parker, and Daniel Thomas, “UK market regulator unveils plan to reform SPAC rules”, Financialtimes, (31-03-2021) <https://www.ft.com/content/1224cfc3-c431-415e-9216-6cb3ab8f78d5> (last accessed on 16-04-2021). 

¹⁰ Tom Metcalf and Silla Brush, “UK revises SPAC rules in a bid to lure blank-check firms”, (30-03-2021) <https://www.bloomberg.com/news/articles/2021-03-31/fca-begins-consulting-on-looser-spac-rules-in-bid-to-grab-market> (last accessed on 16-04-2021). 

¹¹ Berengere Sim, “FCA aims for summer deadline for city SPAC rules”, (31-03-2021), <https://www.fnlondon.com/articles/fca-aims-for-summer-deadline-for-uk-spac-rules 20210331?link=TD_fnlondon_home.27995a643976ebba&utm_source=fnlondon_home.27995a643976ebba&utm_campaign=circular&utm_medium=FINNEWS > (last accessed on 16-04-2021).

¹² Securities Commission Malaysia, Equity Guidelines, Chapter 2, at page 13. <https://www.sc.com.my/api/documentms/download.ashx?id=c81eed76-295b-4027-a89f-ca1feaef0a5b >

¹³ Ibid at ¶ 6.01, page 30.

¹⁴ Ibid at ¶ 6.03, page 31.

¹⁵ Ibid at ¶ 6.09, page 32.

¹⁶ Toronto Stock Exchange, “Guide to Special Purpose Acquisition Companies”, at ¶ 1, page 2,  (04-10-2018), <https://www.tsx.com/resource/en/55#:~:text=A%20SPAC%20must%20raise%20a,%242.00%20a%20share%20or%20unit> 

¹⁷ Ibid. 

¹⁸ Singapore Stock Exchange, Consultation Paper on Proposed Listing Framework for SPACs, (31-03-2021), <https://api2.sgx.com/sites/default/files/202103/Consultation%20Paper%20on%20Proposed%20Listing%20Framework%20for%20Special%20Purpose%20Acquisition%20Companies.pdf> 

¹⁸ Ibid.

¹⁹ Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, Gazette of India, Regulation 6(1) (Sept. 11, 2018).

²⁰ Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, Gazette of India, Regulation 6(2) (Sept. 11, 2018).

²¹ Press Trust of India, “SEBI forms expert group to examine feasibility of SPACs”, (11-0-2021), <https://www.business-standard.com/article/markets/sebi-forms-expert-group-to-examine-feasibility-of-spacs-121031100726_1.html> (last accessed on 17-04-2021).

²² Alan Jones, Mike Bellin, and Eric Watson, “How Special Purpose Acquisition Companies work”, (22-12-2020), <https://www.pwc.com/us/en/services/audit-assurance/accounting-advisory/spac-merger.html> (last accessed on 16-04-2021). 

²³ Supra note 7.

²⁴ Section 4(1)(c), Companies Act, 2013 (18 of 2013), Acts of Parliament (India).

²⁵ Ramabhadran Tirumalai, “Implementation of SPACs in India – Key Regulatory challenges”, (01-06-2018) <https://mnacritique.mergersindia.com/regulatory-challenges-special-purpose-acquisition-company-india/> (last accessed on 17-04-2021). 

²⁶ National Stock Exchange, “Eligibility criteria for IPOs”, <https://www.nseindia.com/companies-listing/raising-capital-public-issues-eligibility-equity-debt> (last accessed on 17-04-2021).

²⁷ Anirudh Laskar, “ReNew Power eyes US listing via SPAC at $4 bn valuation”, (15-02-2021) <https://www.livemint.com/companies/news/renew-power-eyes-us-listing-via-spac-at-4-bn-valuation-11613323873284.html>, (last accessed on17-04-2021).

²⁸ Harshit Rakheja, “Grofers Explores Merger With Cantor Fitzgerald’s SPAC For Nasdaq Listing”, (24-02-2021), <https://inc42.com/buzz/grofers-explores-merger-with-cantor-fitzgeralds-spac-for-ipo/> (last accessed on 17-04-2021)

²⁹ Bindu D Menon, “Videocon d2h gets listed on NASDAQ”, (24-01-2018), <https://www.thehindubusinessline.com/markets/stock-markets/videocon-d2h-gets-listed-on-nasdaq/article7054468.ece> (last accessed on 17-04-2021).

³⁰ Unisted Indian companies allowed on a pilot basis for  a period of two years to list and raise capital abroad without the requirement of prior or subsequent listing in India (Sept. 27, 2013), <https://www.dea.gov.in/sites/default/files/lisitIndianComp_abroad27092013.pdf> 

³¹ Supra note 29.

³² Madhav A Chanchani, “Trans-India Announces Reverse Merger With Solar Semiconductor”, (29-10-2008), <https://www.vccircle.com/trans-india-announces-reverse-merger-solar-semiconductor/> (last accessed on 17-04-2021)

³³ P.R. Sanjai, “Yatra to trade on Nasdaq after $218 million reverse merger”, (15-07-2016), <https://www.livemint.com/Companies/pKhTtLd45UEEsRWVzrKvSJ/Terrapin-3-Acquisition-to-buy-Yatra-Online-in-218-million-d.html > (last accessed on 17-04-2021).

³⁴ Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), Gazette of India, (Apr. 11, 2018). <https://dipp.gov.in/sites/default/files/Startup_Notification11April2018_0.pdf>