On January 12, 2011, the Securities and Exchange Commission (the "Commission") released a notice of filing and immediate effectiveness of NYSE Amex LLC's ("NYSE Amex") amendment to its criteria for listing special purpose acquisition companies ("SPACs"). The amendment provides SPACs with the option to hold a tender offer in lieu of a stockholder vote on a proposed initial business combination. The Commission's release, which comes less than a month after it approved a similar NASDAQ Stock Market LLC ("NASDAQ") amendment, gives SPACs, which incorporate this tender offer feature into their structure, two exchange listing options in the U.S. Though the amendment is effective immediately, the Commission is accepting public comments; it has waived the thirty-day waiting period and retains the authority to temporarily suspend the amendment within sixty days of effectiveness, if necessary.
Background on SPACs and Reason for Amendment
A SPAC is a non-operating company which leverages the expertise of its sponsoring management team to raise capital in an initial public offering ("IPO"). In the IPO, SPACs typically sell units consisting of one share of common stock and one or more warrants to purchase common stock. The units are separable at some point after the IPO. The SPAC's management team is typically required by underwriters to purchase additional shares or warrants at a fair value in a private placement at the time of the IPO. The proceeds from the IPO and the private placement of shares or warrants are placed into a trust account until the consummation of a proposed business combination. If a business combination is not completed within the SPAC's lifespan, as defined in the IPO prospectus and the SPAC's governing documents (typically 18-24 months), the trust funds are returned to the SPAC's IPO investors. No funds are returned to the SPAC's management team, and therefore the investment in the private placement is considered "at risk," as it is lost if a business combination is not consummated. SPACs do not have any prior financial history similar to operating companies.
SPACs reached the height of their popularity in 2007 when 77 SPACs successfully completed IPOs. Over the past several years, the number of SPACs completing IPOs and consummating business combinations dwindled as a result of global economic conditions and certain issues related to the typical SPAC structure. A particular issue relating to the completion of business combinations resulted from certain hedge funds and activist investors abusing the stockholder vote requirement necessary to complete a business combination. These investors used the ability to vote against the proposed business combination as leverage to obtain additional consideration from the SPAC not available to other investors.
In response to this abuse, SPACs sought alternatives to conducting a stockholder vote in connection with a proposed business combination. Any alternative had to provide a similar level of disclosure to that found in proxy or information statements subject to Regulation 14A or 14C under the Securities Exchange Act of 1934.
The tender offer concept was first introduced as an alternative to a stockholder vote in a SPAC registration statement filed in May 2010. Conducting a tender offer and complying with the tender offer rules was a viable alternative to the stockholder vote requirement. Tender offer documents distributed in compliance with the tender offer rules would provide the required disclosure and, to a large extent, remove the ability for investors to leverage their vote for additional consideration. However, a large issue remained. The option to conduct a tender offer was only available for non-exchange listed SPACs that typically trade over-the-counter. Until December 2010, exchange listing requirements applicable to SPACs required stockholder approval of proposed business combinations. However, on December 23, 2010 the Commission approved NASDAQ's amendment, which gave domestic and foreign SPACs the option of conducting a tender offer in lieu of a stockholder vote in connection with a proposed business combination.
NYSE Amex Listing Standards for SPACs
Prior to November 2010, NYSE Amex did not have SPAC specific listing requirements. Instead, NYSE Amex permitted SPACs to list under pre-existing non-SPAC specific listing requirements which allowed companies with no operating history to list. In November 2010, NYSE Amex adopted new listing requirements for SPACs, which required, among other things, that at least 90% of the gross proceeds from the IPO be held in an independent trust account and that the SPAC complete one or more business combinations having an aggregate fair market value of at least 80% of the amount in trust within 36 months of its registration statement's effectiveness. However, until NYSE Amex's recent amendment, NYSE Amex's listing requirements required that SPACs conduct a stockholder vote to approve the proposed business combination. NYSE Amex's recent amendment removes this requirement and includes the option to conduct a tender offer.
What the Rule Change Means for NYSE-Amex Listed SPACs
Selection of an exchange is an important initial decision in the life of a SPAC. Depending on the industry and geographic focus of a SPAC, its listing can impact how fundamental investors perceive the SPAC. Moreover, NYSE Amex's amendment levels the playing field with NASDAQ by removing more onerous requirements that would otherwise drive SPAC sponsors to NASDAQ. This more flexible approach allows the two exchanges to compete more effectively for listings.