Malaysia’s Securities Commission tightens rules governing special purpose acquisition companies

Updated: Thursday December 19, 2013 MYT 4:45:22 PM

Securities Commission tightens rules governing special purpose acquisition companies

BY RISEN JAYASEELAN

PETALING JAYA: The Securities Commission has tightened the rules governing special purpose acquisition companies (SPACs) including extending the moratorium on promoters and initial investors as well as capping the discounts these investors enjoy in their SPAC shares.The SC said its move, via the issuance of practice notes, was aimed at enhancing investor protection and market efficiency. It is also to ensure that the SPAC management team “has a more meaningful financial participation (in the SPAC)” and to “strengthen the alignment of interest with the SPAC’s public shareholders”.

The key points in the new practice note includes a requirement that promoters of a SPAC can only enjoy a maximum 90% discount on their shares vis-a-vis what the IPO investors will be paying. This is an improvement from the previous situation where some promoters secured for themselves a discount of closer to 100%.

This also means that promoters will have to pump in a significant amount of capital into a SPAC. The guidelines require promoters to own at least 10% of a SPAC at the point of its IPO.

The new rules also stipulate that the initial investors of a SPAC can only enjoy a 40% discount on their shares. (Initial investors are a different group from promoters, in that the latter come up with sufficient capital to back the SPAC prior to its application to list on Bursa Malaysia). Again, this puts a healthy cap on how much returns the early investors get for taking the risk of funding a SPAC that hasn’t yet been approved to list.

On the issue of the moratorium placed on promoters, if the SPAC involves resource-based exploration assets, then the moratorium on promoters’ shares extends until the said asset commences commercial production and one full year of audited operating revenue.

Another significant change is that the proceeds from the IPO cannot be used for the remuneration of the management team or their related parties. SPAC rules dictate that 90% of funds raised are to be placed in a trust account while the balance 10% for other costs such as IPO expenses and to fund the search for the qualifying asset.

Indeed, the SC requires sufficient justification on why a SPAC is not placing even the said 10% into the trust account. This situation could crop up where a SPAC raises a lot of money, say RM1bil as 10% of that amounts to RM100mil, so the management team will have to explain to the SC why it isn’t placing the bulk of that RM100mil into the trust account.

The practice note also alludes to the fact that the management team of a SPAC must have the appropriate experience and track record that shows it will be capable of doing a few crucial things: identifying and evaluating target businesses, completing the qualifying acquisition and managing the company based on the strategy outlined in the prospectus.

In this regard, the management team must have the sufficient and relevant technical and commercial experience and expertise.

They must crucially also have a positive track record in companies within the same industry as evidenced by their very contribution to the performance of those companies.

Understandably, they must also have a positive corporate governance and regulatory history.

It is understood that it was issues related to these requirements that had led to some SPAC applications to be rejected by the SC in the past.

Updated: Thursday December 19, 2013 MYT 7:44:30 AM

New rules bode well for special purpose acquisition vehicles investors

BY RISEN JAYASEELAN

THE new practice note on SPACs (special purpose acquisition vehicles) are just what the doctor ordered. It tightens the rules nicely – it does not make it too stifling to the progress of these type of companies and yet strong enough to sufficiently protect investors.

No doubt, until today, there are the doubters, those who decry the Securities Commission (SC) for coming up with these rules that allow the floatation of SPACs which are people raising money to invest in businesses that promise great returns.

The doubters reckon that its hard enough to police our listed companies that have established businesses and real assets. So why create vehicles that seemingly create the opportunity for fraudsters to take advantage of gullible investors?

But they are missing the point. SPACs play a role in the development of our capital market. They offer retail investors the chance to participate in the private equity asset class, which hithertho, were limited to institutional funds. SPACs are also vehicles that facilitate the consolidation of certain industries in Malaysia. For example, a savvySPAC manager should be able to raise capital to acquire distressed manufacturing plants in Malaysia, put them together and create a highly profitable entity. This in turn should have a positive contribution to the economy.

But make no mistake about this – pulling off a successful SPAC or private equity deal and extracting value out of it is no easy task. That’s why some of the best brains in the corporate world end up working in private equity. Not only have you to study the market well enough, you have to able to find and acquire the right assets and execute well enough to extract maximum value.

What was worrisome about SPACs in Malaysia is that everyone seemed to want to do one, following the “success” of the first three. Many of them seemed to be drawn to the massive returns that the promoter and early investors were enjoying, at least on paper.

The new practice note sends out the right message: that promoters need to risk more of their own capital; that the managers have to display how they actually created valued in their previous companies; that moratoriums are tightened; and discounts and salaries of promoters capped.

For example, it is going to be difficult to use the 10% of funds raised for salaries anymore (the 10% is set aside for working capital). Salaries would typically have to be borne by the initial investors. After all, they need to show more skin in the game, considering the discount at which they buy into the SPAC, compared with the IPO investors.

If the rules remained silent on salaries, a group raising RM1bil via a SPAC would technically have access to RM100mil to pay themselves hefty salaries!

Pushing the moratorium until after the qualifying asset displays commercial production and operating revenue is also a right move to ensure that promoters only enjoy the fruits of the SPAC after cashflow is delivered.

But while the new rules prove to be apt decisions, one wonders why these rules were not part of the SPAC guidelines in the first place, when they were first launched in 2009? But it is still a welcome move that this is taking place now.

In any case, two things could develop out of these new rules. On a positive note, the new rules mean that only the best of breed of SPAC ideas would make it to IPO on Bursa Malaysia. It would separate the wheat from the chaff.

Second, it may create two tiers of SPACs: one being the first three SPACs that got listed on the old rules and the other group being the new SPACs that have to adhere to these additional requirments.

Could this result in investors selling out of the first three and buying into the newer ones on the basis of enjoying better protection? Only time will tell.

Senior business news editor Risen Jayaseelan is happy to note that the SC has reiterated its view that there is no sector bias for SPAC applications, meaning that any business model can be proposed provided the idea stands up to scrutiny.