In recent years there has been a trend in other jurisdictions for issuers to go public through a vehicle known as a special purpose acquisition corporation (SPAC). In August 2008, the Toronto Stock Exchange (TSX) published for comment proposed amendments to the TSX Company Manual that will provide a framework for SPACs to be listed on the TSX. These proposed rules are similar to recently adopted rules of the New York Stock Exchange and NASDAQ.
A SPAC is a public shell company, created and led by an experienced management team, which raises equity in an initial public offering (IPO) to acquire an operating business. In 2007, US SPACs raised US$12 billion, with an average offering size of US$183 million.
Those familiar with the Capital Pool Company (CPC) program of the TSX Venture Exchange ? initially developed by the Alberta Stock Exchange and subsequently extended to all Canadian provinces ? will note that SPACs and CPCs have similar features, including clean public shells and management teams with public company experience. However, given their size, SPACs can be compared to “CPCs on steroids” and can offer a greater certainty of financing prior to an acquisition target being identified, as well as a readily available retail and institutional investor base. SPACs are more suited to institutional investors as there are no limits to the amounts that may be invested by any single person in the public offering, whereas with CPCs, an individual investor is limited to 2 per cent of the overall offering.
The TSX has indicated in its comments on the proposed amendments to its Company Manual that in drafting its listing requirements it has considered not only other stock exchanges’ existing rules for SPACs, but also TSX current original listing requirements for operating businesses, the need for investor protection, and the size and nature of the Canadian marketplace.
In order to create a SPAC and complete an offering on the TSX, a SPAC must file a listing statement and clear its IPO prospectus with Canadian securities regulators. The SPAC must raise a minimum of $30 million at a minimum offering price of $5 per security. Securities of a SPAC may consist of one common share and up to two common share purchase warrants. A minimum of 90 per cent of the proceeds of the offering raised in a SPAC IPO must be placed in escrow to be used for the qualifying acquisition. The securities offered must provide for conversion and liquidation distribution rights. If a SPAC does not complete an acquisition in the allotted time from the date of its initial public offering, the funds held in trust must be returned to the securityholders pursuant to the liquidation distribution rights. The conversion right entitles a securityholder to convert its securities to cash if it votes against approval of the qualifying transaction.
The equity interest held by the founding securityholders must be at least 10 per cent of the amount raised by a SPAC. Founding securityholders are not entitled to participate in the liquidation or in the conversion features. There are no indications in the proposed rules of the TSX about the pricing of the initial interest to be acquired by the founding securityholders, which may be significantly less than the IPO price. Furthermore, there is no proposed maximum equity interest for the founding securityholders of the SPAC. The TSX indicates that it “expects that the founding securityholders and underwriters will negotiate a commercially reasonable level of equity interest held by the founding securityholders, failing which a successful marketing of the IPO would be unlikely.” The TSX has also indicated that it would consider excessive an interest of over 20% by the founding security holders in a SPAC.
Once a SPAC has completed its initial public offering, it must complete an acquisition within 36 months from its IPO. The qualifying acquisition must have a fair market value equal to at least 80 per cent of a SPAC’s net assets, and the acquisition is subject to the SPAC shareholders’ approval. The SPAC’s information circular for the shareholders’ meeting to approve the qualifying acquisition must be approved by the TSX, and the SPAC must clear a further prospectus containing disclosure regarding the qualifying acquisition and in accordance with applicable securities laws. A qualifying acquisition must be approved by a majority of the votes cast by shareholders present at the meeting, excluding the founding securityholders.
Upon completion of an acquisition, the SPAC must meet the TSX standard listing requirements for an operating company.
McCarthy Tétrault Notes:
The CPC is designated as “public venture capital” by the TSX Venture Exchange in its marketing material. Will SPACs become “public private equity”? We believe SPACs represent a potential market niche in Canada for IPOs for investors wishing to participate in investment opportunities having a private equity flavour.
It is expected that the TSX will publish the final rules on SPACs shortly. They could come into effect as early as before the end of 2008.