The Toronto Stock Exchange (the "TSX") has adopted rules (the "SPAC Rules") permitting the listing of special purpose acquisition corporations ("SPACs") on the TSX. The SPAC Rules are contained in Part X of the TSX Company Manual.
This memorandum is intended to provide the reader with a brief overview of the SPAC Rules and is not intended to be a fulsome discussion thereof. For questions of a specific nature, please contact Fraser Milner Casgrain LLP as indicated below.
The SPAC Rules provide a two-stage going public process wherein a publicly-traded shell company acquires an operating business. The process is comprised of an initial public offering ("IPO") of the SPAC’s securities followed by the completion of a qualifying acquisition. In this regard, SPACs are similar to the TSX Venture Exchange’s capital pool companies ("CPCs"). The SPAC Rules differ, though, from the CPC Rules and contain more stringent investor protections.
Although similar to reverse takeovers, SPACs generally offer a number of advantages to reverse takeovers, namely: (i) a clean public company shell; (ii) more experienced management teams; (iii) greater certainty of financing; and (iv) a readily available retail and institutional shareholder base.
The Initial Public Offering Stage
At the initial public offering stage, the SPAC Rules provide that a minimum of $30 million will need to be raised through the issuance of shares or units at a minimum price per security of $2. If units are issued, each unit may consist of one share and no more than two share purchase warrants.The $30 million threshold is intended to demonstrate market and management support and to provide sufficient funds for the SPAC to purchase an operating business that is likely to meet TSX listing requirements. Upon completion of the IPO, there must be at least one million freely trading securities held by a minimum of 300 public securityholders. Immediately upon listing on the TSX, the SPAC must place at least 90% of the IPO proceeds and 50% of the underwriters’ commissions from the IPO in escrow with an escrow agent unrelated to the transaction, including trust companies, financial institutions and law firms.The portion of the underwriters’ commission held in trust will only be released to the underwriters upon completion of a qualifying acquisition.
Prior to listing on the TSX, the founding securityholders must subscribe for units, shares or warrants of the SPAC. The TSX expects founding securityholders to hold an equity interest of between 10% and 20% in the SPAC post IPO. However, lower or higher levels may be acceptable depending on the financial and other contributions by the founders. The founders’ securities may not be transferred prior to the completion of the SPAC’s qualifying acquisition and subsequently may be subject to TSX escrow requirements. Additionally, the founders’ securities cannot be voted on the qualifying acquisition and will not benefit from the conversion and liquidation distribution rights (each as described below).
Securities issued by SPACs must include conversion rights and a liquidation distribution feature. The conversion right is intended to permit securityholders (other than founders) who vote against a proposed qualifying acquisition to convert their securities into a pro rata portion of the IPO proceeds held in escrow in the event that the qualifying acquisition is completed. Upon exercise of the conversion right, securityholders are entitled to receive, for each security held, an amount equal to the aggregate IPO proceeds and deferred underwriter’s commissions then held in escrow (net of any applicable taxes and expenses relating to the exercise of the conversion right) divided by the aggregate number of the SPAC’s securities then outstanding.
The liquidation distribution feature is designed to return a pro rata portion of the proceeds held in escrow to securityholders if a qualifying acquisition is not completed within the prescribed time frame of 3 years following the IPO. Upon a liquidation distribution, all securityholders (other than founders) will receive, for each security held, an amount at least equal to the aggregate IPO proceeds and deferred underwriter’s commissions then held in escrow (net of any applicable taxes and expenses relating to the liquidation distribution) divided by the aggregate number of the SPAC’s securities then outstanding, less any securities held by the founders.
To provide additional protection to securityholders, the SPAC Rules prohibit a SPAC from obtaining any form of debt financing until the time of, or after completion of, its qualifying acquisition.
The Qualifying Acquisition Stage
A SPAC’s qualifying acquisition must (i) occur within three years following the SPAC’s IPO, (ii) be approved by a majority of the SPAC’s securityholders (excluding founders), (iii) be approved by a majority of directors unrelated to the qualifying acquisition, and (iv) represent at least 80% of the value of the IPO proceeds.
In connection with the meeting at which securityholders vote on a qualifying acquisition, SPACs are required to prepare and distribute to securityholders an information circular containing prospectus level disclosure. In addition to the information circular, SPACs are required to prepare, file and obtain a receipt from securities regulators for a prospectus containing disclosure regarding the SPAC and the proposed acquisition. While the prospectus and information circular will be separate documents, they will contain substantially similar disclosure.
The issuer resulting from the qualifying acquisition must meet the TSX’s listing requirements as set out in the TSX Company Manual. Finally, failure to obtain TSX approval of the listing of the SPAC prior to the completion of the qualifying acquisition will result in the delisting of the SPAC.