SPAC Listing: Towards Legalization

SPAC (abbreviation for "Special Purpose Acquisition Company", literally translated as "Special Purpose Acquisition Company") is a financial transaction that reasonably avoids the regulation of Rule 419 and integrates securities transactions such as private placement, OTC listing, and reverse takeover. A product of market innovation, the legalized variant of the blank-check company.

(1) The emergence and development of SPAC

In the mid-1990s, the US economy gradually recovered and the capital market became more active. In the new economic environment, David Nussbaum, chairman of GKN Securities, wants to create a new blank-check listing model that complies with Rule 419. It has a desire to re-establish investors' confidence in blank check listings, so almost all the companies it sets up voluntarily meet all the restrictions of Rule 419 through agreements and articles of association.

This model attracted a large number of investors who had been wary of blank check listings. In the two years from 1993 to 1994, David Nussbaum and his team created a total of 13 new blank check companies, and eventually 12 of them were The acquisition was successfully completed. This new blank check listing is also the original SPAC listing model.

In this context, a specific "industry rule" has spontaneously formed among SPAC market players. In order to improve market competitiveness, SPAC will still voluntarily or even exceed the standard to comply with the corresponding regulatory rules. For example, Rule 419 requires that at least 90% of the Funds are deposited into third-party accounts, but SPACs often deposit more than 90% of their funds voluntarily. SEC Deputy Commissioner Shelley Parratt also publicly stated: "Our responsibility is not to prohibit the listing of SPACs, our responsibility is to ensure the openness and transparency of transactions." It fully reflects the regulatory concessions under the conditions of industry self-discipline.

However, the 1990s was not a period of full development of SPACs, because it coincided with the Internet boom in the United States, and it was not difficult for high-tech companies to go public directly, making SPACs less attractive to companies wishing to go public. However, with the bursting of the Internet bubble, it became more difficult for companies to IPO. At this time, the unique advantages of SPACs in helping target companies (especially overseas companies) to go public were reflected, and they developed rapidly and became popular.

In the US market, 12 SPAC companies completed IPOs in 2004, and by 2005, 2006 and 2007, this number had grown to 28, 37 and 65, respectively. In 2007 IPOs, SPACs accounted for 26.6% of all listed companies, raising an average of more than $100 million, including large groups managed by well-known Wall Street companies, such as Merrill Lynch, Citibank, and Deutsche Bank.

(2) General process analysis of SPAC listing

SPAC listing is different from the traditional way of listing by buying a shell.

The specific process can be divided into the following four stages:

The first stage is the shelling stage. At this stage, the management team (usually an investment bank) will register a shell company in the target industry, which has no business plan, few employees, and is only for mergers and acquisitions.

The second stage is the financing and listing stage. In this stage, the shell company needs to register for listing and submit the S-1 (domestic registered issuer) or F-1 (foreign registered issuer) form for the purpose of registration statement (Registration Statement). , SPAC's registration statement contains less content, only including the management profile, target business description, investor protection measures, corporate structure arrangements and other basic information. Then, the shell company will raise funds from qualified investors and list it on the OTCBB. Each unit of stock product issued by the shell company usually includes one common share and a certain amount of warrant shares.

The third stage is the search for target companies and the negotiation stage. The management of the shell company will look for a target company in a specific industry market, and negotiate with the target company about mergers and acquisitions. This stage usually occurs within 18 or 24 months after the listing of the SPAC. If the transaction cannot be completed after this period, the SPAC will not be completed. will be liquidated and all monies invested shall be returned to the investor.

The fourth stage is the M&A and transfer stage. After the SPAC and the target company reach an M&A agreement, they usually merge and change their name. Since SPACs have no business plan and hard assets, and do not need to carry out the "shell-clearing" procedure, that is, the process of asset replacement, the SPAC listing model is more convenient than the traditional backdoor listing method. Shell companies often complete a change of control at the same time as listing on the OTCBB, and within four business days after the transaction closes, a Form 8-K should be filed with the regulatory authority. After the above procedures, companies often choose to transfer the board, and most companies will transfer to the Nasdaq stock exchange, but later SPACs are allowed to be listed directly on the main board by the stock exchange, such as the American Stock Exchange (AMEX). The rapid development of the United States has laid a solid foundation.

(3) The difference between a SPAC listing and a blank check company listing

Because investors have full disclosure and fraud prevention protections, SPACs voluntarily and strictly comply with the regulatory requirements of Rule 419, because if they do not continue to comply with this requirement, the chances of a SPAC successfully raising a public offering are very small. But there are already subtle differences between blank-check companies and SPACs under Rule 419.