A Special Purpose Acquisition Company (SPAC) (also sometimes known as a ‘blank check company’ is a company that is formed exclusively for the purpose of raising capital in order to acquire or merge with a private company and therefore making it public without the need to go through the traditional initial public offering (IPO)process.
Once the publicly traded SPAC has acquired or merged with the operating company, it can become a listed company instead of having to execute its own IPO.
SPACs do not have any commercial operations and are essentially just a means for accompany to go public more quickly. They have become popular in recent years largely because of reduced costs. Traditional IPOs are very expensive to execute but SPACs typically pay for most of the costs saving a significant amount of money for the company.
How is a Special Purpose Acquisition Company used?
In general, SPACs are set up by investors or sponsors who want to pursue a deal in a specific industry or business sector but choose not to divulge information on the target company in order to avoid disclosures during the IPO process.
Since a company acquisition or merger is the sole purpose of the creation of a SPAC, it has just two years to complete a deal before funding is returned to investors and the SPAC is liquidated.
What are the advantages of using a SPAC?
The following are some of the reasons a company may choose to participate in a SPAC deal as opposed to pursuing equity investment or going public with a traditional IPO:
Public companies are sold for higher relative amounts than private companies and the owners of the target company may be able to negotiate a better selling price due to the limited time window to negotiate a deal.
When taking on private equity, company owners lose some degree of control over the company. However, SPACs allow you to maintain a significant stake in the company.
The traditional IPO process can take up to 2-3 years to finalize whereas the route to public offering using a SPAC is typically only 2-3 months.
Traditional IPOs can be very expensive to execute whereas SPACs generally pay for most of the costs which can potentially save a significant amount of money for the selling company.
What are the risks of SPACS?
From an investment perspective, an investor must trust that the promoter has selected the right target company for acquisition or merger. With less oversight from regulators and a lack of disclosure from the SPAC there is a degree of trust that is involved that the investment has not been overhyped.
There also exists a risk that a deal does not go through as planned. Even if the right company is identified and the potential for good returns is there, delays with negotiations for the right purchase price or conditions of the deal may mean that it doesn’t come to fruition.
Finally, there is the danger that the SPAC is unable to raise sufficient capital through the IPO to fund the acquisition. This may occur if there is a lack of investor interest in the acquisition or if market conditions are unfavorable.
The use of SPACs in the UAE
Despite falling popularity and controversy surrounding the use of SPACs, on 14 January 2022, the UAE Securities and Commodities Authority (SCA), recently approved a regulatory framework for Special Purpose Acquisition Companies which is the first of its kind in the GCC region.
It is seen as a valuable way to attract new foreign investment and to encourage global investors to capitalize on business opportunities in the UAE market.
The following are some of the conditions set out in the regulations on the use of SPACs:
- The founders must contribute a minimum of AED 100,000 as initial capital before the public offering and upon completion of the subscription, the total raised capital must be at least AED 100 million.
- The SPAs IPO prospectus must include information on the following things:
- Details of shares and warrants
- Rights attached to each class of shares
- Investment risks
- Terms of refund
- Target sectors/industries
- The target date for completion of the acquisition and any applicable extensions
- The professional history of all founders and managers
- Managers’ exclusive management powers
- Any known potential conflicts of interest
- A public offering application must be submitted to the SCA and signed by the SPACs founders and directors who accept all liability for the information included.
- In order to carry out the public subscription, the SPAC must appoint a listing advisor, financial advisor and receiving bank.
- A minimum of 3% and a maximum of 20% of the issued shares must be subscribed to by the founders.
- Before the subscription is opened, an invitation must be extended to the public in two local UAE newspapers.
- The shares and warrants offered must be classified into two categories: professional investors and retail investors.
- Subscription must remain open for a minimum of 5 working days and a maximum of 30 business days and all shares and warrants must be fully paid up on subscription. (a 10-day extension can be applied for through the SCA if all shares and warrants are not fully subscribed to during this period).
- A SPAC must list on an onshore stock market within 3 business days of the issuance of the SCA registration certificate.
- Allocations must be made within 5 business days of the close of subscription
- If the shares are not fully subscribed to within the subscription period, the offering will be cancelled, the SPAC can’t list and must then liquidate.
- A minimum 0f 90% of the proceeds from the subscription must be deposited in an escrow account within two business days of receipt from the investors and the funds can only be used for funding the acquisition, refunding investor amounts,and paying the escrow account fee.
- The valuation of the targeted entity should be carried out by an SCA approved independent valuer and the value must be at least 80% of the available escrow funds.
- Completion of the acquisition is contingent on approval of the SCA and 75% of the investors.
In the event the acquisition does not happen within the planned time frame, the SCA also sets out conditions around extension to the acquisition period or refund of investments should the acquisition fail to be completed.
How to set up a SPAC in the UAE
Below is a brief overview of the steps involved in establishing a SPAC from its incorporation to eventual listing:
- Application for a SPAC designation
- Application for a commercial license submitted to the SCA
- IPO application
- Public offering invitation
- Submission of final prospectus with the SCA
- Allocation of shares and warrants
- Application for issuance of registration certificate
The increasing use of IPOs in the UAE is certainly helping local equity markets achieve a better standing on the global stage. However, a lack of investor knowledge on the use of Special Purpose Acquisition Companies remains a barrier to this listing route gaining significant traction in the country.
Nonetheless, the UAE’s rapid progress in implementing such a complex investment vehicle is representative of the maturity and ambition of the UAE market and given time it has the potential to significantly increase further foreign investment.
How can Global Link help?
Global Link has over 16 years’ experience working with local and global businesses, providing bespoke consultancy services for company incorporation in Dubai and the wider UAE.
We can advise you on setting up a Special Purpose Acquisition Company in the UAE and provide support through the incorporation process and beyond,liaising with all relevant parties on your behalf to ensure a swift and seamless setup.
If you need advice on holding companies or for any other company incorporation, visa or PRO service, please get in touch with us on +971 4 553 9901 or email us at [email protected] and we will be happy to assist you.