Blank Cheques and PIPE Dreams

Normally, when a company seeks a listing on a stock exchange, it will already have an existing business that fulfils the relevant criteria, such as profit record and minimum market capitalisation, prescribed by the listing authorities.
A special purpose acquisition company (“SPAC”), also called a blank cheque company, is an exception to the norm as a SPAC will seek a listing on a stock exchange without having any existing operations or income generating business. The SPAC will attempt to raise funds from its public offering for the purpose of acquiring a business (“qualifying acquisition”).
The listing of SPACs gained momentum in the United States in 2020, with approximately US$83.4 billion being raised by such companies that year. Those who thought 2020 was the banner year for SPACs were mistaken as the amount raised in the US in the first quarter of 2021 has already surpassed that amount, with approximately US$97.3 billion being raised to add to the dry powder available to SPACs.
Boarding the Gravy Train
With the US markets abuzz about SPACs, securities regulators in other jurisdictions have been quick to jump on board the gravy train. The Hong Kong Exchanges and Clearing (HKEX), Singapore Exchange (SGX) and Indonesia Stock Exchange (IDX) have announced their intention to facilitate the listing of SPACs on their respective exchanges in the near future.
The Singapore Exchange has in fact issued a Consultation Paper on Proposed Listing Framework for Special Purpose Acquisition Companies on 31 March 2021 to seek market feedback on its proposed regulatory framework for the listing of SPACs on its Mainboard. Not to be left behind, the Indonesia Stock Exchange has also announced that it will introduce its SPACs regulations by July 2021.
The Securities Commission Malaysia (“SC”), the principal regulator of the Malaysian capital markets, has maintained a judicious silence despite the announcements by other regional stock exchanges of plans to introduce a framework for the listing of SPACs. The SC’s silence should not be misconstrued as a sign that the Malaysian capital market lags behind its regional peers in this regard. To the contrary, Malaysia has in fact established a framework for the listing of SPACs well before blank cheque companies became en vogue of late.
Days of Future Past
The framework for the listing of SPACs was introduced in Malaysia when a new set of Equity Guidelines (“Guidelines”), issued by the SC on 8 May 2009, came into effect on 3 August 2009.
The first SPAC to be listed in Malaysia was Hibiscus Petroleum Berhad which was listed on the Main Market of Bursa Malaysia on 25 July 2011. Since then, there have been a further four SPACs listings, of which three have been or are in the midst of being delisted due to their inability to complete a qualifying acquisition within the time frame prescribed in the Guidelines.
Features of a SPAC under the Malaysian Framework
The following is a summary of some of the main requirements applicable to a SPAC under the Guidelines.
  1. Approval for listing
The approval of the SC is required before a SPAC can be listed on the Main Market of Bursa Malaysia. A SPAC may not seek a listing on the ACE Market.
Among the factors the SC will consider are: (i) experience and track record of the management team; (ii) compensation of the management team; (iii) extent of the management team’s ownership in the SPAC; (iv) the business objective and strategy of the SPAC; and (v) potential returns to investors.
In addition, the SPAC must be structured in a manner that aligns the interest of the management team with those of the public investors.
  1. Jurisdiction of incorporation
A SPAC must be incorporated under the Companies Act 2016 of Malaysia.
  1. Business objective and strategy
A SPAC must disclose its business objective and strategy in its prospectus.
  1. The management team
The SPAC must demonstrate that its management team has the experience, qualification and competence to achieve its business objective and strategy, and will be able to, among others, identify and evaluate acquisition targets and manage the company sustainably based on the business strategy outlined in the SPAC’s prospectus.
  1. Fund-raising
A SPAC may only raise funds from the public through an issue of new securities (“IPO”), and not through an offer for sale of existing securities. However, it may also undertake a placement of securities which complies with the relevant requirements under the Guidelines.
The minimum amount of funds that a SPAC must raise through its IPO is RM150 million. The SPAC is required to demonstrate that the gross proceeds raised from the IPO is sufficient to undertake a qualifying acquisition that will enable the SPAC to have a core business of a sufficient size and scale relative to the industry in which it intends to operate, and offer reasonable returns to its investors relative to the returns in the industry.
  1. Ringfencing the proceeds
At least 90% of the gross proceeds raised from the IPO must be deposited in a trust account with a custodian which is a trust company registered with the SC or a licensed bank or licensed investment bank. The remaining balance of the proceeds may only be used to defray expenses related to the IPO, operating costs, fund the search for target companies and complete the qualifying acquisition. However, such proceeds may not be used to pay, directly or indirectly, the remuneration of the management team before the qualifying acquisition is completed.
  1. Additional financing
A SPAC is not permitted to issue any securities prior to the completion of the qualifying acquisition except by way of a rights issue.
The raising of debt financing is subject to the following restrictions: (i) any credit facility obtained before the completion of the qualifying acquisition may only be drawn down after the approval of the qualifying acquisition; (ii) the funds may only be used to part-finance the qualifying acquisition, defray related costs or enhance the business acquired under the qualifying acquisition; and (iii) monies in the trust account must not be used as collateral for the debt financing.
  1. The qualifying acquisition
A qualifying acquisition requires the approval of the SC as well as members of the SPAC in a general meeting. Special approval thresholds apply in relation to the latter, in that the approval must be obtained from the majority in number of holders of voting securities representing 75% of the total value of securities held by all holders of voting securities present and voting on the resolution at the general meeting. Members of the management team and persons connected to them are not allowed to vote on the qualifying acquisition.
The qualifying acquisition must be completed within 36 months of the listing of the SPAC on Bursa Malaysia and must account for at least 80% of the aggregate amount held in the trust account.
A qualifying acquisition may consist of several transactions. In such event, the agreements relating to each transaction must be inter-conditional and be completed simultaneously.
As a general rule, a qualifying acquisition should result in a SPAC having an identifiable core business of which it has a majority ownership and management control. The SC may consider a qualifying acquisition that does not result in the SPAC having a majority stake in the business if two conditions are satisfied, namely (i) that such non-majority stake is in line with the regulations of or practices within the relevant industry; and (ii) the SPAC will have management control notwithstanding that it does not have majority ownership.
A SPAC that proposes to undertake a qualifying acquisition involving a long gestation period or a high level of uncertainty must demonstrate that the proposal is not detrimental to the interest of investors and that the management team is committed to the SPAC until such time that the business objective is achieved.
  1. Jumping off the bandwagon
Holders of voting securities (other than members of the management team and persons connected to them) who vote against a qualifying acquisition must be given the right to receive a pro rata portion of the amount in the trust account, net of taxes and facilitation expenses, in exchange for a surrender of their securities, if the qualifying acquisition is approved and completed within the 36-month time frame.
  1. Restrictions on management team
The Guidelines impose various restrictions on the management team, amongst which are the following:
  1. Minimum ownership threshold: Members of the management team must, in aggregate, own at least 10% equity interest in the SPAC on the date of its listing on Bursa Malaysia;
  1. Management team’s rewards: The rewards to the management team, both in terms of quantum and timing, must not be disproportionate to the expected shareholder value creation and the timing of such value creation. Security-based compensation, such as employee share option schemes, are not permitted before the qualifying acquisition is completed;
  1. Minimum price: The minimum effective price of securities issued to the management team must be at least 10% of the IPO price;
  1. Condition of discount: When securities of a SPAC are issued to the management team at a discount from the price of the securities under the IPO, the level of discount must commensurate with the business strategy and expected returns of the SPAC;
  1. Moratorium: Members of the management team are prohibited from disposing any of the securities of the SPAC held by them as at the listing date before the qualifying acquisition is completed. Thereafter, they may dispose up to a maximum of 50% per annum, on a straight line basis, of their respective holdings in the securities under moratorium. In approving a qualifying acquisition, the SC may impose a condition for an extended moratorium on the sale of securities held by the management team; and
  1. Extended moratorium: If a qualifying acquisition involves assets which are not yet income generating, the moratorium imposed on the members of the management team will be extended until those assets have generated one full financial year of operating profits and positive cash flow from operating activities.
  1. Restrictions on pre-IPO investors
The Guidelines impose the following restrictions on pre-IPO investors:
  1. Minimum price: The minimum effective price of securities issued to pre-IPO investors prior to the IPO must be at least 60% of the IPO price; and
  1. Moratorium: Any securities acquired by pre-IPO investors at a price which is less than the IPO price may not be disposed of before the qualifying acquisition is completed.
  1. Warrants
A SPAC may issue warrants as part of its listing scheme. In addition to complying with the Main Market Listing Requirements, an issue of warrants is subject to the following restrictions: (i) only one class of warrants may be issued and the exercise price must not be lower than the IPO price of the ordinary shares of the SPAC; (ii) the warrants may not be exercised before the qualifying acquisition is completed; (iii) the warrants must expire at the end of the time period allowed for completing a qualifying acquisition if no such acquisition is completed; and (iv) upon the liquidation of the SPAC, the warrants shall not be entitled to the funds held in the trust account.
  1. Liquidation of the SPAC
A SPAC which fails to complete a qualifying acquisition within 36 months of its listing date must be liquidated. The moneys held in the trust account (including income earned from permitted investments but net of taxes and direct expenses relating to the liquidation) must be distributed to the holders of the voting securities on a pro rata basis.
Members of the management team and persons connected to them as well as pre-IPO investors are not permitted to participate in the liquidation distribution except in respect of securities purchased by them after the listing of the SPACs. In addition, pre-IPO investors may participate in the liquidation distribution in respect of shares subscribed by them as part of the IPO.
  1. MOG assets
Additional requirements apply when the qualifying acquisition involves the acquisition of mineral or oil and gas assets.
En garde
As a SPAC seeks to raise funds from investors without any existing business operations, it is natural that the SC would put in place mechanisms to protect the interests of the investors pending the “de-SPACing” of the SPAC, i.e. the consummation of the transaction that results in the SPAC having a business operation through the shares, assets or business acquired under the qualifying acquisition. 
These safeguards, such as those outlined in paragraphs 4, 8, 10 and 11 above, are quite stringent. In particular, those mentioned in paragraphs 10 and 11 ensure that the management team has sufficient skin in the game to stay the course with the SPAC as it transitions from a shell into an operating business. 
The requirement for a SPAC to disclose from the outset, its business objective and to demonstrate the capability of its management team in the given area limits the flexibility as to the type of qualifying acquisition that the SPAC can undertake. For example, a SPAC that is established to own and operate hospitals will not be able to execute a qualifying acquisition that will transform it into a mega used-car dealer.
Betting on the Future
Investment funds and renowned hedge fund managers, venture capitalists in the US appear to be prepared to bet on the future in their quest for higher returns. These funds and individuals have committed to participate in SPAC-mergers, usually involving technology companies and start-ups which may not have the necessary track record to undertake a direct listing. These investments are usually effected through a form of private placement known as PIPE investments (private investments in public equity).
Jurisdictions like Indonesia appear to be following this trend. According to its development director, the SPACs regulations of the Indonesia Stock Exchange will allow loss-making companies with high valuation and good growth prospects to be listed on its Main Board. This may be a pre-emptive step by the Indonesian regulators to keep the country’s five home-grown unicorns, Gojek, Traveloka, Bulalapak, Tokopedia and OVO from following the path set by Singapore-based Grab to seek a listing in the US stock markets. 
When one recalls the early days of, which took six years after its listing to be profitable, betting on the future may not be a bad strategy in the longer term, as the share price of the company has since skyrocketed by more than 120,000% from its IPO price of USD18 per share. However, not all stories will have a happy ending. The rush to list technology companies and start-ups could result in overhyped and overvalued companies being merged with the SPACs. For those who invest in these SPACs, the dreams of making extraordinary returns on their investments may turn out to be pipe dreams.
Quo Vadis
Of the five SPACs that have been listed on Bursa Malaysia, two (i.e. Hibiscus Petroleum Berhad and Reach Energy Berhad) have completed their qualifying acquisitions and become full-fledged operating companies. The remaining three (Sona Petroleum Berhad, CLIQ Energy Berhad and Red Sena Berhad), have been or are in the midst of being delisted due to their inability to complete a qualifying acquisition within 36 months of their respective listing dates. The domestic SPAC landscape has been barren since Red Sena Berhad made its debut on the exchange on 10 December 2015.
With the recent interest in SPACs, not only in the United States, but also in Indonesia, Singapore and Hong Kong, it may now be appropriate for the SC to re-examine the Guidelines to determine whether and the extent to which the current SPACs framework should be liberalised to enable Bursa Malaysia to be competitive in the listing of such companies. 
Article by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine.