DFSA releases a Markets Brief about its likely approach to listing SPACs in the DIFC (Dubai International Financial Centre).
Although there are no specific rules for listing SPACs at this time, the DFSA would expect new SPAC applicants to demonstrate that their businesses are suitable for listing under MKT 9.3.4. To give effect to the approach suggested in this brief, the DFSA would also consider imposing conditions for listing under Article 34 of the Markets Law on a case-by-case basis. In the future, the DFSA may consider to introduce a more detailed rules-based framework.
A SPAC (also known as a “blank cheque company” or “cash shell company”) is a publicly traded shell company with no commercial operations that is formed to raise capital in an IPO solely in anticipation of later identifying and acquiring a target private company. Following the completion of an acquisition, the enlarged operating company is still traded on an exchange. A SPAC is formed by a management team.
It is essential to keep in mind that the contents of this brief are not meant to be Guidance as defined under the Regulatory Law of 2004 and thus they should not be construed as such. If you require individual guidance, you must refer to the DFSA Rules for Guidance.
Risks associated with listing SPAC
The risks associated with SPACs differ depending on how the SPAC is structured and where it is in its lifecycle.
Generally, the life cycle of a SPAC is 2 years and involves (i) an IPO, (ii) a time period leading up to an acquisition of a target company. (iii) a vote by shareholders on the acquisition, (iv) a liquidation event or the new operational company (as enlarged as a result of the acquisition) continues to trade on an exchange.
The following are some of the known risks associated with SPACs that investors should be aware of.
A SPAC must be able to instantly disclose confidential information on the acquisition of a target company. Failing to do so may result in an uninformed market and the termination of the SPAC’S securities’ listing and trading.
Quality of management and strategy
The risk that the management staff is neither qualified nor competent. To pick the ideal target company, investors rely on the quality of the management team.
The risk of an investor in a SPAC making a wrong investment decision is due to a lack of information. The SPAC prospectus is likely to contain fewer information than a regular commercial company. Based on their experience in other markets, investors are likely to rely their investment decisions on the management team’s reputation and performance.
Structure and incentives
The risk of shareholder dilution. There may be components of a SPAC structure that dilute shareholders’ interests. Example of such components include the management team’s nominal share investment, a marketing fee for redeemed shares, and any warrants or other security-related incentives given as part of the transaction.
The risk that no acquisition takes place and investors lose some of their money. SPACs often establish a two-year timeframe for identifying a target company. If failed to do so, the SPAC will be liquidated and the money refunded to the investors. A SPAC cannot guarantee that it will acquire a target company. In such circumstances, investors may earn less than they invested, as well as the lost opportunity cost of having committed money they could have invested elsewhere.
Conflicts of interest and fraud
The dangers of possible conflicts of interest and frauds. As previously mentioned, the management team is usually rewarded for identifying and completing a target company’s acquisition within a particular timeframe. This might lead to low-quality acquisitions being offered late in the SPAC’s life cycle, or management team decisions being influenced by conflicts of interest relating to a proposed target company.
Transparency and due diligence in respect of a target business
It is essential that the information provided to shareholders is enough for them to make a wise voting decision.
Suitability for listing
The enlarged company must fulfill the DFSA’s listing eligibility standards (and, if relevant, prospectus requirements).
Speculative trading of SPAC shares
The SPAC’S core economic worth should be about equal to the cash collected at the IPO (plus interest and minus operational expenses). However, speculation on potential target company acquisitions being explored by the SPAC may cause price changes and volatility in its share price.
Incorporation and other jurisdictions
There’s a possibility that shareholders rights will vary based on the company’s nature and insolvency legislations in various jurisdictions.
DFSA approach to listing SPAC
The DFSA approach is designed to mitigate the risks associated with listing SPACs. Each SPAC will be considered on a case-by-case basis.
Appointment of a sponsor firm under the MKT Module
To begin with, the new applicant SPAC will be required to appoint a sponsor firm under MKT 7.1.2. for the initial listing of a SPAC and the acquisition of a target company. For ongoing communications with the DFSA, the sponsor firm will be the principal contact.
Safeguarding capital raised
To safeguard investors from misappropriation of funds or excessive running costs incurred by the SPAC’s management, SPACs should ring-fence proceeds raised from investors. This can be done through a legal structure managed by an independent third party such as a trust or an escrow-type arrangement.
SPACs have two years, within the prospectus’s date, to find and acquire a target company. If shareholders approve, the SPAC’s operational life can be extended for another 12 months. If a SPAC does not complete acquisition by the end of its operating life, ring-fenced proceeds should be returned to shareholders.
Board and shareholder voting rights
SPACs should abide by the following procedures when considering a prospective acquisition:
- Obtain board approval
- Provide shareholders with the right to vote on an acquisition
- Ensure shareholders are given enough information to make an informed decision regarding the proposed acquisition
- Issuing a statement that the proposed transaction is fair and reasonable in the eyes of shareholders after consulting with a competent, independent expert. The statement should be published before the shareholder vote date.
Shareholder redemption rights
SPACs should allow shareholders to redeem their shares at a predetermined price.
Retail investor restriction
Circumstances where we restrict offers, and the trading of shares to professional clients only may occur.
Liquidity providers should be appointed.
Primary market disclosure
The Markets Laws state that a prospectus should contain all the necessary information an investor would need to conduct a well-informed assessment of
(a) the assets and liabilities, financial positions, profits and losses, and prospects of the issuer and any guarantor; and
(b) the nature of the securities and the rights and liabilities attaching to those securities.
Secondary market disclosure
SPACs will be treated equally as all other Reporting Entities. As a result, SPACs will be subject to the DFSA’s corporate governance, inside information and other ongoing duties, financial information disclosures, market abuse prevention, and takeover regulation. Following acquisition, the new target company will become the SPAC’s principal operations.
If SPACs do not comply with continuing obligations and disclosure requirements, listings and trading securities from uncertain markets may be suspended. This is done to protect investors.
How Valsen Can help
The experienced staff of Valsen Fiduciaries Group and our global network allow us to provide high-quality services in several jurisdictions across the world. We are at your disposal to assist you with anything you need to know about listing SPACs in the DIFC. Please get in touch with us through [email protected] or + 248 2525 217.