Updated: Jun 10
In March 2021, the number of SPAC IPOs reached an all-time high, with 110 cases. In April 2021, the number of SPAC IPOs dropped sharply to 13, and in May there were only 19 SPAC IPOs. So will the SPAC market pick up quickly in the future, or will it continue to adjust? The main reason for the recent adjustment of SPAC The recent cooling in the SPAC market stems from multiple factors. First, the change of US government has caused the US Securities and Exchange Commission (SEC) to become more cautious about SPACs. The SEC recently issued a series of statements to emphasize the need for SPACs to comply with the rules of the securities market. In a statement on April 12, the SEC stated that the warrants issued by SPAC should be treated as liabilities rather than equity in accounting. Although this statement did not release any new laws and regulations, and the accounting treatment will not affect the value of SPAC itself, it shows that the SEC's decision to strike out against the SPAC market. This signal caused a shock in the SPAC market. Prior to this, the statement or opinion issued by the SEC on SPAC only warned market practitioners and did not have a substantial impact on the SPAC market. Second, after the settlement of SPAC M&A transactions in the past period of time, the performance of the target company did not reach the expected level disclosed before the settlement, which led to shareholder lawsuits. The third is a deeper macro factor. From the second half of 2020 to the first quarter of 2021, due to the Fed's loose monetary policy, the capital market prefers technology stocks, and the target companies of SPAC mergers and acquisitions are usually technology companies, so the market has a higher enthusiasm for SPAC. As the U.S. economy gradually feels the pressure of inflation, the price of U.S. Treasury bonds has risen, the market speculates that the Fed is about to raise interest rates, and large institutional investors have begun to favor value stocks and commodities, resulting in a decline in the market’s enthusiasm for SPACs. Sustainability of the SPAC market Although the SPAC market is undergoing adjustments, based on the annualized calculation of the 13 SPAC IPOs in April 2021, there will still be 156 SPAC IPOs in a year. This number is nearly three times that of 2019, and it is still considerable. The SPAC market is not falling in free fall, but is transitioning to a more standardized and rational. The target company and PIPE investors began to carefully consider the pros and cons of merging with SPAC, which means that SPAC sponsors will face greater pressure. At present, there are more than 400 SPACs seeking transactions in the market at the same time. In order to complete the merger and acquisition within the prescribed time limit, the initiator may need to give up part of his own income, thereby attracting the target company and PIPE investors. On the one hand, the target company and PIPE investors will require the promoters to give up part of their equity. For example, link the promoter’s equity with the redemption amount of the SPAC public shareholders. On the other hand, if the promoters are not willing to give up their equity directly, they will choose to tie their own earnings with other parties. For example, if the price of SPAC shares rises after the announcement of the SPAC M&A transaction, the target company will acquire more equity, and the promoters do not have to give up their own equity; and if the price of SPAC shares falls, the promoters will give up their holdings Part of the warrants are intended to boost the stock price. It has become increasingly difficult for SPAC M&A transactions to obtain PIPE investment. Even some promoters with relatively strong financial strength choose to provide hundreds of millions of dollars in guarantees to complete the transaction without PIPE investment. There are also some PIPE investors who choose to invest in target companies in non-traditional ways, such as buying convertible bonds. As a financial instrument that can provide certainty in trading and valuation for the target company's listing, the market for SPAC has already taken shape. High-quality sponsors will re-initiate a new SPAC after completing a complete set of transaction procedures and start a new round of transactions. Investors also favor continuing to invest in the SPAC initiated by them. Therefore, the SPAC market is in a healthy waiting period. In the long run, it will eventually find its balance and continue to develop. Will Asia establish a local SPAC market? Both Singapore and Hong Kong have recently expressed interest in establishing a local SPAC market, but neither has launched a timetable for the implementation of specific policies. On March 31, 2021, the Singapore Exchange issued a consultation document on the proposed SPAC listing framework. In mid-May, the Secretary for Financial Affairs and the Treasury of Hong Kong, Xu Zhengyu, said in an interview with Bloomberg that he would put forward legislative proposals on the introduction of the SPAC listing mechanism in Hong Kong in the short term and receive public consultation. Whether it is Hong Kong or Singapore, the establishment of a local SPAC market will face the following problems. First of all, the key factor in the rise of the SPAC market is that SPAC provides certainty and flexibility in transactions. Therefore, whether Hong Kong and Singapore can provide the same flexibility as the US market is crucial. Hong Kong's capital market regulatory system is different from that of the United States. The US regulatory system focuses on risk disclosure, while Hong Kong's regulatory agencies will implement more substantive reviews. On the other hand, SGX intends to adopt stricter rules than the United States in the SPAC consultation document published by SGX. For example, only shareholders who vote against SPAC mergers and acquisitions have the right to redeem their own shares, which will greatly reduce the possibility of approval of SPAC mergers and acquisitions, thereby reducing the certainty provided by SPAC mergers and acquisitions. In addition, the capital markets of Singapore and Hong Kong are smaller than those of the United States. After the target company is listed through a merger with Singapore or Hong Kong SPAC, the trading volume and valuation of its shares may not reach the level that can be achieved by a merger with the US SPAC. . Concluding remarks In the past year, SPAC has developed rapidly and has become a highly flexible and highly operable IPO channel. With the continuous standardization of the SPAC market, the target company has become more and more powerful in SPAC M&A transactions, and financing costs have been significantly reduced compared to last year. The market turbulence in April indicates that the number of SPAC IPOs will become normal. In addition, the prospects for Hong Kong and Singapore to establish a local SPAC market are not clear. It can be foreseen that the SPAC market is in a healthy waiting period. In the long run, it will eventually find its balance and continue to develop.
For further information, please contact: Ruomu Li, Partner, Morrison & Foerster firstname.lastname@example.org