Special purpose acquisition companies ("SPACs") are newly formed entities that raise capital through an initial public offering ("IPO") of their equity securities. The securities are usually units comprised of common shares and warrants, and the proceeds are usually deposited into a trust and subsequently held in U.S. treasury bills (or equivalents). SPACs raise this capital in order to fund an acquisition of an existing operating company or companies within a specified time period (typically 24-36 months). Though the SPAC itself has no business operations, investors entrust an experienced founding management team to seek out and consummate a value-building acquisition, often in a particular industry, sector or geographical region within which the management team has experience or expertise.
SPACs began to reappear on capital markets in 2003, and to date there have been 161 SPAC IPOs. In the U.S., early SPACs typically listed on the Over-the-Counter Bulletin Board ("OTCBB"). Seven SPACs listed on American Stock Exchange ("AMEX") in 2005, the first year any exchange allowed SPAC listings. By 2007, however, there were 50 SPAC listings on AMEX and only 16 on the OTCBB. In Europe, Euronext and the London Stock Exchange's Alternative Investment Market ("AIM") are the two primary listing options. The first European SPAC was listed in 2005 on AIM. There have been a total of 11 SPAC IPOs listed in Europe, raising a combined $2.9 billion. Three SPACs have listed on Euronext, the most recent of which raised almost $440 million in a July 2008 IPO. SPAC listing options in the U.S. increased in 2008 when the Securities and Exchange Commission ("SEC") approved proposals from the New York Stock Exchange ("NYSE") and the National Association of Securities Dealers Automated Quotation System ("NASDAQ") to add SPAC-specific listing standards. Previously, NYSE and NASDAQ listing rules required companies to have some operating history prior to listing, which disqualified SPACs from doing so. The latest exchange to court SPACs, the Toronto Stock Exchange ("TSX"), proposed rules on August 15, 2008 that would permit the listing of SPACs. Although the market for SPACs is essentially closed at the moment, the permitted listing on NYSE and NASDAQ, and the foreseeable listing on TSX, will provide SPAC management teams with several additional listing options once the market for SPACs reopens.
In 2008, the SEC approved rule changes proposed by NYSE (approved May 6, 2008) and NASDAQ (approved July 25, 2008) that allowed for the listing of SPACs. For both NYSE and NASDAQ, SPACs must first meet the relevant exchange's initial listing standards, applicable to all companies. For NASDAQ, this means that companies seeking to list on the NASDAQ Global Market must have a minimum market value of listed securities of $75 million and meet general distribution requirements by having 400 round lot holders and 1.1 million publicly held shares. Companies seeking to list on the NASDAQ Capital Market must have a minimum market value of listed securities of $50 million and meet general distribution requirements by having 300 round lot holders and 1.0 million publicly held shares. For NYSE, companies must meet general distribution requirements by having 400 round lot holders and 1.1 million publicly held shares. Both exchanges require SPACs to meet corporate governance requirements applicable to operating companies. In addition, each exchange's newly adopted rules impose additional conditions on SPACs, essentially codifying some of the important stockholder protections already included in the structure of most SPACs. In some respects, the exchanges' listing standards offer more flexibility than the typical market terms of a SPAC. A SPAC that is structured to include current market terms will likely meet the SPAC-specific listing criteria of NYSE and NASDAQ.
As a threshold matter, NYSE requires that the SPAC demonstrate an aggregate market value of $250 million and a market value of publicly held shares (i.e., excluding shares held by officers, directors or their immediate families and 10 percent holders) of $200 million, as well as meet the NYSE's general $4 minimum IPO price per share requirement. NASDAQ does not have a separate minimum market value for SPACs.
The exchanges have many additional SPAC requirements in common:
Both exchanges require that at least 90 percent of the gross IPO proceeds and the proceeds of any concurrent sale of the SPAC's equity securities be held in a trust.
Both exchanges require that the SPAC complete one or more business combinations with an aggregate value equal to at least 80 percent of the net assets in the trust within three years of the effective date of the IPO.
Both exchanges require that the SPAC's initial business combination be approved by a majority of the votes cast by public stockholders (although NYSE excludes stockholders who are officers, directors and 10 percent or more stockholders). However, only NASDAQ requires the business combination(s) to be approved by a majority of the SPAC's independent directors.
Both exchanges provide that public stockholders voting against the proposed business combination have the right to convert their shares of common stock into a pro rata share of the aggregate amount in the trust if the business combination is consummated. Both exchanges allow the SPAC to establish a limit (no lower than 10 percent of the shares sold in the IPO) as to the maximum number of shares with respect to which a public stockholder, together with affiliates acting as a "group," may exercise such conversion rights. Additionally, for NYSE, the SPAC cannot consummate a business transaction if public stockholders owning in excess of a threshold amount (no higher than 40 percent) of the shares of common stock issued in the IPO exercise their conversion rights.
NYSE has a number of additional SPAC-specific rules that are not addressed by NASDAQ. For example, for NYSE, the SPAC's founding stockholders must waive their rights to participate in any liquidation distribution with respect to all shares of common stock owned prior to the IPO or any private placement purchase in conjunction with the IPO (including warrants). In addition, the underwriters in the IPO must agree to waive their rights to any deferred underwriting discount deposited in the trust if the SPAC liquidates prior to completing a business combination.
It is important to note that NYSE and NASDAQ retain discretion to consider SPAC listings on a case-by-case basis, considering factors such as the management team's experience and compensation, the restrictions on completing and approving business combinations and the extent of management team's equity ownership. Thus, the listing criteria set forth above are merely minimums and meeting them does not guarantee that a SPAC will be allowed to list on NYSE or NASDAQ. It is also important to note that, if the securities of the SPAC are listed as units, the components of the units other than common stock ( e.g. , warrants) are required to independently meet the applicable initial listing standards of the respective exchange. The NYSE rules also contain provisions that cover continued listing standards for SPACS for the periods prior to, during, and following the consummation of an initial business combination. These rules address the potential application of the NYSE rules on "back door listings" ( i.e., a strategy used by a company that wants to go public, but does not otherwise meet listing criteria, of acquiring a public company) to SPAC transactions.
NASDAQ requires that the SPAC notify NASDAQ about each proposed business combination. Following each business combination, the combined company must meet the requirements for initial listing.
Toronto Stock Exchange
On August 15, 2008, the TSX proposed rules that would permit the listing of SPACs. Currently, the TSX only lists operating companies meeting certain financial requirements. However, the TSX has stated that it has recently observed the growing number of SPACs that have gone public in the U.S. and that recent SPAC offerings have included a wide array of investor protections that mitigate the TSX's previous concerns regarding the listing of SPACs. The proposed rules take into consideration the recently adopted NYSE and NASDAQ rules, and incorporate certain best practices observed in the U.S. SPAC market.
The TSX proposed listing requirements for SPACs would essentially offer the same investor protections as those implemented by the NYSE and NASDAQ. However, similar to SPAC listings on Euronext, management teams would be allowed to source deals prior to the IPO. However, SPAC management teams would be prohibited from entering into binding agreements prior to the IPO. Unlike the NYSE and NASDAQ rules, which do not permit an initial business combination to be consummated where stockholders owning greater than a certain threshold (to be set no higher than 40 percent) exercise their conversion rights, the proposed TSX rules do not set a maximum threshold amount for conversion. However, the SPAC may elect to set a limit so long as it is disclosed in the SPAC's IPO prospectus and information circular.
The TSX proposed requirements also include the following: (i) prior to the IPO, SPAC founders must subscribe for securities (units, warrants or shares) representing an aggregate equity interest of at least 10 percent of the SPAC immediately following the IPO; (ii) 90 percent of the gross IPO proceeds and 50 percent of underwriting compensation must be placed into the trust; and (iii) the initial business combination must be consummated within 3 years.
Furthermore, the TSX SPAC listing requirements will contain a minimum offering threshold of C$30 million, which is lower than that of AMEX, allowing smaller issuers an opportunity to list in the regulated market. In addition, under the TSX proposed rules, a SPAC will only be permitted to issue additional securities prior to the initial business combination by way of a rights offering to existing securities holders and may only complete other equity or debt financing simultaneously with, or immediately following, the initial business combination. The TSX will also retain discretion to consider factors that it views relevant and appropriate when assessing the merits of listing a SPAC. In particular, the TSX will consider factors including a management team's track record and experience, the extent of the founding stockholders' equity ownership in the SPAC and the gross proceeds publicly raised in the IPO.
Until 2008, the only regulated market in the U.S. open to SPACs was AMEX. The new NYSE and NASDAQ rules lift these restrictions on companies without an operating history by establishing additional requirements for SPACs, which codify some of the important stockholder protections already present in most SPAC structures. Listing SPACs on the NYSE and NASDAQ reflects increased market interest for SPACs in 2007 and early 2008 and should provide greater liquidity and market exposure for SPACs should the market for SPACs reopen after the present market lull.
M. Ridgway Barker is Chair of the Corporate Finance & Securities Practice Group of Kelley Drye &Warren LLP. Michael L. Pflaum is Special Counsel in the Corporate Finance & Securities Practice Group at Kelley Drye & Warren, LLP. Acknowledgement is given to Michael A. Rueda and Julia Sitarz, Associates at Kelley Drye & Warren LLP, for their efforts in the preparation of this article.