The TSX is proposing to permit the listing of special purpose acquisition corporations. SPACs are shell companies that raise capital in an IPO with a mandate to acquire an operating business within a specified period of time. They are similar to capital pool companies (CPCs) listed on the TSX Venture Exchange, but SPACs are much larger than CPCs in terms of IPO proceeds and the size of the acquired business. The TSX’s proposal to permit SPAC listings follows the growing market acceptance of SPACs in the United States, where the NYSE and AMEX permit, and Nasdaq will soon permit, SPAC listings. Comments on the TSX proposal are due by September 15, 2008. The proposed rules are also subject to Ontario Securities Commission approval.
Overview of SPACs Under Proposed TSX Rules
- A SPAC must raise IPO proceeds of at least $30 million, with a minimum price per security of $5.
- Within three years of the IPO, the SPAC must acquire one or more operating businesses with a combined minimum value of approximately 80% of the IPO proceeds, with the resulting issuer meeting TSX’s original listing criteria.
- Founding securityholders’ equity interest in the SPAC must be at least 10%.
- The acquisition must be approved by securityholders, excluding founders.
- Securities issued in the IPO must have a conversion right and liquidation distribution feature, described below.
Market Conditions for SPACs
In the United States, 2007 was an important year for SPACs, when they made up approximately one-quarter of IPOs. SPAC financings continued in the first quarter of 2008, when the NYSE and Nasdaq announced their intention to begin listing them. Since then, the SPAC IPO market has weakened, and some SPACs that recently went public are still seeking operating businesses to acquire. According to the TSX, as of April 2008, approximately US$18 billion of IPO proceeds have been raised by SPACs that haven’t yet completed an acquisition. Given the continuing tight credit conditions constraining other potential buyers, SPACs – which by definition are clean shell companies with cash on hand and a limited period of time in which to acquire an operating company – could play an active role in M&A activity in the future.
Investor Protection Mechanisms
The TSX’s proposed listing requirements contain several investor-protection mechanisms, which are meant to compensate for SPACs’ lack of financial and operating history. These features are consistent with U.S. requirements.
The information circular to be mailed to securityholders regarding their approval of an acquisition will have to contain prospectus-level disclosure relating to the operating business and be precleared by the TSX. In addition, prior to mailing the information circular, a prospectus containing full, true and plain disclosure regarding the resulting issuer, assuming completion of the acquisition, will have to be cleared with securities regulators.
Liquidation Distribution and Conversion Rights
A minimum of 90% of a SPAC’s IPO proceeds must be deposited in trust for the future acquisition. The trust fund must also include 50% of the underwriters’ IPO commissions, to be released upon completion of the acquisition. If an acquisition is not completed within the time required, the SPAC must return the trust funds to securityholders – this is the liquidation distribution feature. If an acquisition is completed, securityholders who voted against it will be entitled to exchange their securities for a pro rata portion of the trust funds – the conversion right. Founding securityholders will not be entitled to participate in any liquidation distribution or conversion right.
80% Minimum Acquisition
If any securityholders exercise their conversion right, this will necessarily reduce the amount of proceeds available to fund the acquisition. Consequently, the SPAC may be unable to complete an 80% acquisition without additional debt or equity financing. Additional financing is permissible under the TSX’s proposed rules, but it may only be obtained concurrently with, not in advance of, the acquisition. Multiple acquisitions are also permitted if necessary to reach the 80% threshold, but they must each be approved by securityholders and they must close concurrently.