Why the ASX is watching SPACs closely

By Gary Anders

In financial circles they are known as special purpose acquisition companies or SPACs – shell entities with no active business operations that have been listed on a stock exchange.

With a stockpile of cash raised from investors, the sole objective of the venture capitalists behind each SPAC is to seek out a privately held company that can be acquired and then taken public.

Compared to a traditional initial public offering (IPO), the process for listing a SPAC is typically less arduous on a regulatory level and therefore quicker and considerably cheaper.

The benefit for investors is that they can tap into the investment skill sets of the people behind the SPAC right at the ground floor and potentially receive a strong capital return over time.

However, this is a waiting game, because the management behind a SPAC generally don’t have a specific target in mind when their takeover vehicle is listed.

They have about two to three years to complete an acquisition following the SPAC’s IPO. If they don’t, they must liquidate the company and return the capital raised to the other investors.

The bulk of SPAC listings to date have been in the US, and last year set a new record, with more than US$83 billion (A$113 billion) in capital being raised from investors across almost 250 IPOs.

That US dominance is rapidly changing, however, with the Euronext Amsterdam having emerged as the favoured stock market for European SPAC listings.

The London Stock Exchange is also considering relaxing its existing listing rules to encourage an increase in UK SPAC listings.

Getting SPAC-ready?

For now, the Australian Securities Exchange (ASX) is holding back. It prohibits stock market listings of what it terms “cash box companies”, where cash makes up more than 50 per cent of an entity’s assets.

Yet, while there won’t be any SPAC listings on the ASX in the near future, we are likely to see an increase in mergers and acquisitions (M&A) in Australia led by foreign-listed SPACs.

Australian entrepreneurs Patrick Grove and Luke Elliott recently listed the Catcha Investment Corp SPAC on the New York Stock Exchange, raising US$300 million (A$400 million) and indicating they are actively seeking a major technology company acquisition in Australia.

The volume of capital being raised by SPACs in the US and Europe will invariably generate more M&A activity in the Australian market, says Nicole Pedler, partner at law firm Herbert Smith Freehills specialising in M&A and equity capital market transactions.

This in itself may create potential complications for some Australian companies should they be targeted by a foreign-listed SPAC.

In addition to having to negotiate the pricing and terms of the takeover deal, the companies will need to be in a compliance-ready state in order to transition into being a company listed on an international stock exchange.

 

"The structure for SPACs is evolving. We are doing work to consider the opportunity carefully. We will listen to the market and take a cautious approach."

 

The transition process is called “de-SPACing” and, on average, takes only about three to five months from announcement to completion.

“Where, if they wanted to get IPO-ready in Australia, they’d be thinking about the ASX listing rules, they actually need to get familiar with the environment of being listed predominantly in the US,” Pedler says.

“They need to have their accounts in order and to have enough of a track record of having the right type of accounts and a level of diligence around those to be able to be de-SPAC-ready.

“They’ll also need to have the kind of board and governance that allow them to be very quickly listed as well.

“For most companies, they will have to go through a process of having their accounts reopened and refashioned to ensure they comply with offshore accounting standards.”

Jude Lau FCPA, partner audit and assurance and corporate advisory at HLB Mann Judd, says that the closest thing to a SPAC in Australia is when a company is established to raise seed capital, which then acquires a project and lists on the ASX.

“The common issues in that space are that, predominantly, those businesses have historically not complied with an accrual basis of accounting. That’s one change that needs to be adjusted for.

“As an extension of not complying with an accrual basis of accounting when they used to prepare their accounts, they never would have complied with the revenue recognition and measurement requirements of Australian accounting standards.

“It does then take time to address all of those issues. You’re talking about potentially having to do two to three years’ worth of historical audits.”

The ASX is monitoring the SPAC space

The ASX says it is examining “the SPAC phenomenon” closely.

“Our focus is on achieving the best outcome for the Australian market and for local investors,” says Max Cunningham, executive general manager of listings and issuer services at the ASX.

“We have had approaches from parties about our preparedness to consider changing or waiving our anti-cash box rules to facilitate SPAC transactions.

“However, the history of cash box companies in Australia has been poor, and there are important scale, regulatory and commercial differences between the Australian and US markets.

“Nevertheless, the structure for SPACs is evolving. We are doing work to consider the opportunity carefully. We will listen to the market and take a cautious approach.”