Let's start with a few news stories
On January 28, faraday Future, an electric car company, released a blockbuster announcement with a "triple bombing" effect, announcing that it would be acquired by an American SPAC company, and at the same time achieve the triple purpose of going public on the NASDAQ, being acquired, and raising $1 billion.
According to the statistics of FactSetData and SPAC Insider, there were 246 traditional listings on the US stock market in 2020, while SPAC was listed in 248 cases, and the financing amount of SPAC listing was 83 billion US dollars, which was rapidly approaching the 100 billion US dollars of financing that was listed on the traditional IPO that year.
Following the record-breaking heat of 2020, the number of SPAC listings in 2021 continues to hit a new high, reaching 160 as of February 20, 2021, raising more than $48.3 billion, and raising more than half of the funds raised in less than two months.
From the perspective of listed companies, whether it is an initial public offering of shares or a backdoor listing, one of its common features is that there is a business first and then a listed company, that is, a company with a business that has operated a certain performance period seeks to become a listed company. In the backdoor listing transactions in China's securities market, the "shell" can initially become a listed company because the "shell" itself has a continuous operation business. However, the above-mentioned news, which is also new and popular in the US securities market and the most attractive topic in the world, is probably the SPAC listing (the "new" here is not the "new" of the SPAC listing mechanism, which has been around for decades; its "new" is that the SPAC listing has become a new trend). Let's start with the usual listings. Typical listing concepts in China's securities market usually include initial public offerings and backdoor listings. Direct listing without initial public offerings of shares in China's securities market is not yet practiced, while the U.S. stock market has clear rules and precedents for direct public offerings (DPOs). The essential characteristics of the SPAC model can be summarized as having listed companies first and then having businesses. SPAC is a company initiated by promoters (mostly investment banks, fund managers and other professional institutions and personalities), before and after the IPO there was no commercial operation, and the only purpose of the establishment at the beginning of the establishment was to raise funds through the IPO. The ultimate goal of SPAC is to load the business through mergers and acquisitions within a certain period of time after the IPO (usually two years) (the process of loading the business is called De-SPAC).
What is SPAC mode
SPAC, whose full name is Special Purpose Acquisition Company, literally translates to "special purpose acquisition company", also known as "blank check company", is an investment tool that provides enterprises with listing financing. SPAC is a listed "Blank Check Companies" formed by mutual funds, hedge funds, etc. The promoter sets up a special purpose company, raises funds through an IPO and goes public, but the company has no substantial assets other than funds. SPAC companies help target companies achieve listing purposes through SPAC mergers and acquisitions by looking for unlisted target companies for investment and mergers and acquisitions.
SPAC originated on the Toronto Stock Exchange in Canada in the 1990s.
The SPAC model is a listing model, financing instruments and investment targets for different entities.
To put it simply, we can describe him as a "crowdfunding campaign" with high pressures.
With the popularity of the SPAC model, stock exchanges in the Asia-Pacific region have also turned their attention to SPAC listing. Following the SGX's first statement on February 17 that it would investigate SPAC, the Hong Kong government also said in a statement on March 2 that hong Kong authorities were studying whether to allow SPAC to go public. To some extent, attracting growth-oriented science and technology innovation enterprises to go public through the SPAC model has become a "must for the military" of major international financial centers.
Many Chinese companies and investment institutions are also looking into this area.
SAPC mode feature
SPAC from the sponsor's perspective
It has the channel attribute of promoters raising and managing investors' assets in the securities market, which is different from private fund managers who can only raise funds through private placement, the former can raise funds through the open market. As for whether SPAC is listed and registered, the following points are as follows:
a The circumstances of the promoter, including track record and reputation, and the experience and expertise of the SPAC management team; b The nature and scope of the management team's compensation; c The share structure of the promoter and management team in SPAC; d Whether the interests of the promoter and management team are consistent with the interests of other shareholders; e The time allowed to complete the business combination prior to liquidation allocation; the dilution characteristics and events of f SPAC, including those that may affect shareholders, and whether there are any mitigating factors for such dilution; g Percentage of the amount held in the escrow account that must reflect the fair market value of the business combination;h other factors that SGX considers to be consistent with the protection of investors and the promotion of the public interest.
SPAC from the perspective of public investors
After the IPO and before De-SPAC, it is similar to the public fund with the stock market as the main investment
SPAC from the perspective of the target of the acquisition (the business being loaded).
More like its backdoor listing "shell". SPAC mode operation key points
(Considering that Chinese law stipulates that SPAC is not currently operable in China, this part can be ignored, but it is recommended to understand if there are institutions, individuals or companies that intend to list overseas if they are willing to develop overseas investment business)
Licensing time limits for completing business consolidation
The SPAC must exist within the time limit from the date of listing to the completion of the business merger, which the promoter can stipulate in the SPAC Charter. Under special circumstances, an extension is allowed, but the extension requires an independent shareholder (the promoter and management team and its affiliates are not independent shareholders) to vote on a special resolution and needs to apply to the exchange at the same time, and the exchange has the right to refuse the extension after review. If SPAC is unable to merge or acquire an unlisted company within the term (usually two years), it will be liquidated and investors can recover their funds.
SPAC listing financing funds need to be custody and strictly used
Funds placed in trust accounts and their interest income may not be used for purposes other than a) redemption of shares of shareholders voting against the business combination; b) cash distributions at the time of liquidation of SPAC; c) interest proceeds may be used for (i) administrative expenses at the time of IPO, (ii) general operating expenses incurred for the purposes of the business combination, and (iii) expenses related to the search for the subject matter and the completion of the merger;
d) Other exceptions, subject to the approval of a special resolution by independent shareholders and approval by SGX.
Minimum capital contribution requirements for promoter shareholders and management teams
The ratio of the market value of the consolidated subject to the amount of SPAC financing is required
Lock-up period for the shares of promoter shareholders, management teams, controlling shareholders and their affiliates
Business consolidation sponsors and management teams and their affiliates cannot participate in voting
A mechanism for the protection of shares against the risk of dilution
Only independent shareholders who voted against the De-SPAC transaction are entitled to have the company redeem the shares, but whether the redemption shares will be cancelled and the accompanying warrants, if any, need to be agreed.
Participation of Asian capital in the SPAC model
Although the number of Chinese companies that have adopted the SPAC model to go public is limited, Chinese companies are obviously not unfamiliar with this model. In addition to Faraday Future, a recent example is the co-working platform Ucommune, which filed an IPO application with the U.S. Securities and Exchange Commission (SEC) in December 2019, but after more than half a year of waiting, finally switched lanes to SPAC and completed the listing in about four months. SPAC, a Chinese company that has previously made headlines, was United Family and Midland International Education Group, two companies that are the largest companies in China's private hospital and English training industry, respectively. In 2018, 6 of the 48 Chinese companies listed in the United States adopted the SPAC model.
Take Li Zekai, the second son of Hong Kong's richest man, Li Ka-shing, who set up two S PACs in 2020 and landed on the NASDAQ in the United States, raising more than $800 million in total. Bloomberg recently reported that Li Zekai is planning to set up a third SPAC in the United States and raise hundreds of millions of dollars. On March 10, the Wall Street Journal broke the news that SPAC, which Chinese businessman Li Ning co-founded, also submitted a listing application in the United States.
How lawyers conduct business related to the SPAC model
In view of the current provisions of mainland law, SPAC cannot be listed on the Shanghai Stock Exchange and shenzhen stock exchange, so the lawyer intends to carry out relevant business and needs to focus on the market where the SPAC model is operated. Such as the United States, the United Kingdom, Singapore and Hong Kong. Among them, Singapore and Hong Kong have not really started the landing of SPAC, which is suitable for lawyers to build service content and reserve potential customers in advance. It is particularly competitive for law firms that have set up branches outside the mainland.
Lawyers can provide legal services in the following areas:
The first type, such as the legal services for customers to be listed overseas through the SPAC model, include but are not limited to: according to customer requirements, do SPAC feasibility analysis report to assist customers in designing listing plans and building transaction structures
Domestic enterprises need to adopt appropriate restructuring methods to change from domestic structures to cross-border structures.
The agreement control structure (or VIE structure) applies to the industry in which china restricts foreign holding or prohibits foreign investment. For example, some value-added telecommunications services, film and television production, distribution business, Internet cultural service business, education services, etc.
The red-chip structure in which an overseas company holds equity in a domestic operating entity is applicable to industries in which the industry is not restricted by China from foreign holding or foreign investment is prohibited. For example, thanks to the current popularity of the cryptocurrency market, several cryptocurrency onshore service providers are also actively seeking A US listing method. This structure requires the NDRC, the Commercial Commission and foreign exchange registration procedures stipulated by Chinese law
It is particularly noteworthy that for developing enterprises, the later the time, the larger the volume, the higher the capital and tax costs of building the structure.
It is explained that customers have two ideas for overseas listing through the SPAC model, one is to choose the SPAC that has already been listed to seek to be acquired, and the other is to set up SPAC through related entities and then reverse merger (special note, there must be no definite or potential merger object before the establishment of SPAC).
At present, a large amount of money in the US capital market is concentrated in SPAC, and these SPAC companies are looking for acquisition targets. These listed SPAC IPOs raised a total of $82 billion. Under a 24-month period, they need to complete the acquisition of another company in 2021 or 2022. SPAC has become a financing channel that companies take very seriously, and may even rely on. Chinese companies interested in landing on the U.S. capital market need to pay special attention to this channel.
It is recommended that enterprises pay close attention to these new opportunities and maintain the awareness of updating information with intermediaries that are closer to the market when necessary, such as lawyers and brokers.
Assist clients to avoid compliance risks
Non-compliance is divided into non-compliance of non-material matters and non-compliance of major matters, and the non-compliance of some non-material matters may still meet the listing conditions after disclosing some non-material matters at the time of listing, but the non-compliance of major matters directly affects whether the enterprise meets the listing conditions and even the development prospects of the enterprise. We recommend that companies maintain active communication with Chinese lawyers to determine the timing and conditions for establishing structures and improving the level of business compliance.
In particular, the choice of IPO, RTO, DPO or SPAC to list overseas is likely to be a matter of change for a specific company. It is entirely possible for a particular business to abandon an IPO in a matter of weeks and move to the SPAC approach, and vice versa. Even if you select a direction, the time window can change rapidly. The opportunity to go public in the right way and in the right time window for a short period of time belongs only to companies that are ready in both aspects.
In the second category, the client intends to act as the initiator of the SPAC
The SPAC registration file is almost formatted, as long as the resumes of directors and executives are changed on the standard template. Therefore, the preparation and submission of registration documents are very simple. The entire registration process for SPAC – from the decision to the IPO to the completion of the IPO – takes about 8 weeks, much faster than a normal IPOs.
For promoters, SPAC can be publicly raised compared to private funds; compared with public funds, funds can be disguised to invest in unlisted company equity.
Institutional investors can also use their resources and connections to participate in SPAC listing transactions as financial advisors, to identify matching target companies for SPAC sponsors, or to find benchmark SPAC shell resources for many technology-based and high-growth enterprises seeking listing financing.
Legal services include, but are not limited to:
SPAC company set up related services
SPAC registration related services
SPAC Compliance Operation Services
In the third category, the client intends to invest in SPAC
For investors, SPAC is more open and transparent than private equity funds, and shares can be traded publicly; compared with public funds (which can only invest in stocks, bonds, etc. of listed companies), they can obtain equity appreciation by participating in the IPO of the merged enterprise.
Individual and institutional investors in China can participate in the SPAC model as investors with overseas foreign exchange funds. The export of domestic RMB funds is subject to China's foreign exchange control policies, because there is no specific investment project at the time of the establishment of SPAC, and it is not expected that the ODI path will be feasible. The QDII path and the QDLP (Qualified Domestic Limited Partnership) path being piloted can be considered and worth exploring.
Feasibility report of the company investing in SPAC
Investment transaction structure construction
Review of agreements, delivery of equity and funds.