Jaime Cheng, Jack Hsieh
Despite being around since the 1990s, in the last two years, we’ve seen a significant surge in the number of public offerings conducted via special purpose acquisition companies (“SPACs”) in the United States. The number of SPAC IPOs in the U.S. have increased from 59 in 2019 to 248 in 2020, and 330 as of May 31, 2021. This phenomenon has been attributed to historically low interest rates, the increase of high-profile sponsors, reputable targets, and celebrity endorsements. With more than US$104 billion raised so far in 2021, regulators in Hong Kong, Singapore, and Indonesia are considering whether to allow SPAC listings in their jurisdictions. In Taiwan, the Financial Supervisory Commission’s Chairperson, Dr. Tien-Mu Hang, stated on March 15, 2021 that the Taiwan Stock Exchange (“TWSE”) is also evaluating whether to revise the rules to permit SPAC listings. According to TWSE, the report will be released by the end of June 2021.
What are SPACs?
In a nutshell, SPACs are shell companies formed for the purposes of raising capital through an initial public offering (“IPO”). As SPACs do not have any operations, the IPO process can be considerably quicker as compared to traditional IPOs. It should be noted that SPACs typically do not have a target identified at the IPO stage; otherwise, such information would need to be included in the IPO prospectus, increasing the length of the IPO process.
Units and IPO Proceeds
In a typical SPAC IPO, sponsors will purchase founder shares at a nominal amount (usually US$25,000) for 20% of the shares being registered for the public offering. Public investors generally hold units, which are usually priced at US$10 each and consist of one share of redeemable common stock and a fraction of a warrant for a right to purchase one share of common stock in the future at a fixed price. Whole warrants may be exercisable to purchase one share of common stock, and the exercise price of the warrant is typically 115% of the unit price. The funds raised in the SPAC IPO are placed in a trust account to fund the acquisition of the target or to redeem the shares sold to public shareholders.
While SPACs generally do not have a target identified at the IPO, they will typically identify the industry or geographical location of the intended target. The SPAC generally has 18-24 months after the IPO to identify a target and complete the acquisition (de-SPAC transaction), which usually takes the form of a merger. If the SPAC successfully identifies a target within the allotted timeframe and is approved by the shareholders, the funds in the trust account are released to fund the acquisition. If the SPAC fails to identify a target within the timeline or approved extensions, the SPAC will be liquidated, and funds in the trust account will be returned to the public shareholder on a pro-rata basis. Further, prior to the closing of the de-SPAC transactions, public shareholders are entitled to have their shares be redeemed at a price equal to US$10 per share plus accrued interest.
For targets, a de-SPAC transaction is an attractive alternative to traditional IPOs in terms of price certainty, as the price is negotiated and determined once the agreements are executed for the business combination transaction. The downside for equity holders of the target is that their shareholding will be diluted due to the founder shares and the private placement warrants issued by the surviving company.
Due to the redemption mechanism, many SPACs are required to raise additional capital, which is customarily in the form of private investment in public equity (“PIPE”), i.e., the private placement of debt or equity securities of the SPAC, or a forward purchase arrangement where the sponsor or other institutional investors commit to purchase newly issued shares of the SPAC to provide additional funding on the closing of the de-SPAC. The proceeds from the PIPE or forward purchase arrangements are used to finance the de-SPAC transaction, e.g., covering the cost of shares redeemed from public shareholders and the working capital requirements of the surviving company.
It is expected that with the increase of SPACs, so does the potential of litigation. The focus of SPAC litigations will likely be centered on insufficient disclosures during the de-SPAC transaction and conflict of interest due to incentives for sponsors to close a de-SPAC transaction before the deadline expires.
SPAC Listing in Taiwan?
There are two stock exchanges in Taiwan, i.e., the TPEx (“Taipei Exchange”) and the TWSE. The TPEx is for over the counter and bond trading, and as of May 31, 2021, the TPEx has 787 listed companies with a combined market capitalization of NT$ 4.8 trillion. The TWSE is the main exchange in Taiwan, and as of April 30, 2021, there are 951 companies listed on the TWSE with a combined market capitalization of NT$ 53 trillion.
It is the authors’ view that there are currently two major regulatory hurdles for sponsors to see SPAC listing in Taiwan as a viable option. First, is that the listing rules of TWSE and TPEx require that the company applying for listing on the applicable exchange be incorporated for a certain period of time, i.e., 3 years for TWSE and 2 years for TPEx. Moreover, both TWSE and TPEx requires that the company meets certain profitability requirements, which for the TWSE requires a record of financial performance of a minimum of 2 years and for TPEx requires a record of financial performance of a minimum of 1 year.
Considering that SPACs generally have 18-24 months after the IPO to identify a target and complete an acquisition, it is unlikely that SPACs’ sponsors will wait a 3 years (or 2 fiscal year for TPEx listing) to be listed and then complete an acquisition in another 18-24 months. Moreover, the profitability requirements of TWSE and TPEx would prohibit SPACs from publicly listing on such exchanges, as SPACs generally do not have any operations, and thus, no revenue, income or cash flow. As such, the listing rules need to be amend to modify these two requirements in order for Taiwan exchanges to be considered for initial public offerings via SPACs. The Taiwan policy and rules toward SPAC listing may be clearer once TWSE’s evaluation report is released by the end of June 2021.
 The authors are lawyers at Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.
 SPAC IPO Transactions: Summary by Year, SPAC Insider (last visited June 1, 2021).
 SPAC and US IPO Activity, SPAC Analytics (last visited June 1, 2021).
 Kabanage, S. (2021, May 7). SFC May Have Doubts About Allowing SPAC Listings – Report. Regulation Asia. https://www.regulationasia.com/sfc-may-have-doubts-about-allowing-spac-listings-report/