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Securities Commission Revises SPAC Framework

22 December 2021

The Securities Commission Malaysia (‘SC’) announced on 16 December 2021 revisions to the Special Purpose Acquisition Company (‘SPAC’) framework (‘SPAC Framework’) by amending the SC’s Equity Guidelines (‘Equity Guidelines’). The revisions to the SPAC Framework will take effect on 1 January 2022.
 
Unless otherwise stated, a reference to a ‘paragraph’ in this article is a reference to a paragraph of the Equity Guidelines.
 
The main revisions to the SPAC Framework are set out below: 

  • A qualifying acquisition (‘QA’) can now be effected through a business combination including a merger (Amended paragraph 2.01). 

  • The minimum amount of funds to be raised through an initial public offering has been reduced from RM150 million to RM100 million and the requirements for a SPAC to demonstrate that the gross proceeds to be raised is sufficient to enable the SPAC to have a core business with sufficient size and scale and to offer reasonable returns to investors have been removed (Amended paragraph 6.09). 

  • To minimise the risk of greenmail, the threshold for approval of the QA by shareholders of a SPAC has been reduced from 75% to a majority in number of the holders of voting shares representing more than half of the total value of shares held by all holders of voting shares present and voting (Amended paragraph 6.39). 

  • The issue price of shares offered for subscription for which a listing is sought must be at least RM2.00 each (New paragraph 6.09B). According to the SC, the rationale for this amendment is to ensure that SPACs will attract investors who are able and willing to undertake the unique risks associated with investing in SPACs. 

  • A SPAC may issue new securities in conjunction with a QA provided that: (a) the securities are only issued after shareholders’ approval of the QA; (b) the funds raised must be applied towards the financing of the QA, defraying related costs or enhancing the target business; and (c) it must comply with the relevant requirements under Chapter 6 of the Main Market Listing Requirements (‘MMLR’) (New paragraph 6.27A). According to the SC, this provision applies to private placements. 

  • The principal adviser must act as the placement agent or joint placement agent, where applicable (New paragraph 6.27B). 

  • A SPAC management team may now include professionals with private equity or venture capital background (New paragraph 6.13A(b)(ii)). 

  • The prohibition against changes in the board of directors or the key members of the management team of a SPAC as a result of a QA is liberalised to allow such changes where a QA is effected by way of a business combination (Amended paragraph 6.37). 

  • The interest of each member of the management team appointed by a venture capital or private equity firm registered with the SC may be held by such venture capital or private equity firm (New Guidance 10 of the Equity Guidelines). 

  • It is now provided in the amended paragraph 6.31 that the target business comprising the QA must satisfy the following qualitative criteria:
  1. the profit test set out in paragraph 5.02(a)(i) based on its audited financial statements for the preceding three financial years (excluding the ‘uninterrupted’ profit requirement in the said paragraph and the operating history requirement in paragraph 5.02(a)(ii)); or the market capitalisation test set out in paragraph 5.02(b)(i) and the operating history requirement set out in paragraph 5.02(b)(ii); and
  1. the target business must have a healthy financial position, with a sufficient level of working capital for at least 12 months from the date of the circular issued to shareholders for approval of the QA and no accumulated losses based on the latest audited financial statements at the time of submission to the SC, if the target business is subjected to the profit test.
  • A SPAC is now required to state whether it will comply with the shareholding spread requirements under the MMLR upon completion of the QA; and in the event of non-compliance, its plans to comply with such requirements (New paragraph 6.31B).
  • A SPAC may impose a limit as to the maximum number of voting shares which a shareholder voting against a QA, together with any affiliate or person connected, may tender in exchange for cash, provided that such limit must not be lower than 10% of the total shares issued in the initial public offering. Such limit must apply equally to all shareholders of the SPAC who are entitled to exercise this right (New paragraph 6.25A).
  • The right of a SPAC to issue warrants as part of its listing proposal is now subject to a restriction that the number of new shares which will arise from the exercise of the warrants must not exceed 50% of the enlarged number of issued shares of the SPAC (New paragraph 6.12(e)).
  • The following new moratorium requirements have been introduced:
  1. where a SPAC makes a QA by way of a business combination, members of the management team will not be allowed to sell, transfer or assign any of their holdings in the securities of the SPAC as at the date of listing of the SPAC on Bursa Malaysia, from the date of listing until six months after the completion of the QA. Thereafter, members of the management team will be allowed, for each subsequent period of six months, to sell, transfer or assign up to a maximum of 50% of their respective holdings in the securities under moratorium (New paragraph 6.18(c));
  1. where a QA results in securities being issued to the vendors of the target business, the consideration securities received by the vendors of the target business must be subjected to a moratorium, which at the minimum, prohibits the vendors from selling, transferring or assigning any of their consideration securities for six months from the date the securities are listed on Bursa Malaysia or from the date of issue if the securities are not listed (New paragraph 6.20A);
  1. where a QA involves mineral or oil and gas (‘MOG’) exploration or extraction assets which are not yet in commercial production, the vendors will not be allowed to sell, transfer or assign any of their consideration securities until such time that the MOG assets acquired have achieved one full financial year of operating revenue and positive cash flow from operating activities (New paragraph 6.20B); and
  1. where the vendors of the target business are entities which are not listed, all direct and indirect holders of these entities, if they are individuals or other entities which are not listed, up to the ultimate individual holders must give undertakings to the SC that they will not sell, transfer or assign any of their respective holdings in the entities which are not listed for the period as stipulated in paragraphs 6.20A or 6.20B, as applicable (New paragraph 6.20C).
Comments
 
A significant number of the  revisions to the SPAC Framework, such as permitting QAs to be effected by way of business combinations, permitting individuals from the private equity or venture capital industries to participate in the management of a SPAC, allowing a SPAC to raise additional funds from other investors for purposes related to the QA, are welcomed as they liberalise and provide greater flexibility and dynamism in the promotion of SPACs.
 
The reduction in the approval threshold for a QA from 75% to a simple majority in number of the holders of voting shares representing more than half of the total value of shares held by all holders of voting shares present and voting will not only reduce the possibility of greenmail as mentioned by the SC, but may increase the prospects of the QA being approved by the shareholders of a SPAC.
 
On a wider perspective, the renewed interest in SPACs in this region1 was largely fuelled by investors’ bullishness over SPACs in the United States in the first quarter of 2021.2 However, recent statistics suggest that investors’ interest in SPACs in the United States has waned, with the percentage of redemptions by investors who decline to participate in SPAC-mergers increasing significantly and the stock price of a number of recent SPAC-mergers falling well below their initial listing price.3 Although some may argue that the revision of the SPAC Framework by the SC has come too late, we are nevertheless of the view that these revisions are welcomed as they liberalise the SPAC Framework in Malaysia and provide greater flexibilities in financing QAs for those who are still interested in promoting or adopting SPACs as a means to a listing on the local bourse.
 
Article by Fariz Aziz (Partner), Kok Chee Kheong (Partner) and Vanessa Ho (Associate) of the Corporate Practice of Skrine. 
 
 
1 Singapore launched its SPAC framework on 2 September 2021. Hong Kong will do the same on 1 January 2022. Indonesia had announced that it would also launch a SPAC framework.
2 Our Firm’s previous article on SPACs can be accessed here.
3 SPAC boom fizzles as investors cash out, StarBiz, 20 December 2021.
 

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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