SPACs have been on the rise since 2020. In the US, SPAC IPO counts increased by 320% in 2020 followed by 46% in 2021 as of July 3, 2021. As of gross proceeds raised by SPAC IPOs, value increased by 513% in 2020 followed by 34% in 2021. With SPACs, New York leads the rest of the world in IPO activities. However, SPAC is not something that exists in the US only. SPAC is also seen in the UK, except that the current regulation in the UK restricts trading for SPACs shares once the SPACs have identified acquisition targets to protect investors from volatility until merger proxies are released. This was seen as a challenge for SPACs in the UK, and the UK government is considering a revision. In Asia, SPACs are seen in Korea, first introduced in 2009. The Korean SPACs are usually set up by financial institutions as local regulation requires a security broker license as a prerequisite. Besides Korea, Hong Kong and Singapore are also exploring ways to bring in SPACs to help companies (usually late-stage startups) gain access to the capital markets faster.
Why Are SPACs Created Anyway?
While SPACs are on the rise, it leads to one question: why are SPACs created anyway? And why did it suddenly gain popularity? SPACs clearly possess some advantages for them to gain popularity. For example, it takes 3–4 months for the SPACs to complete the merger process and bring a private company public. As for traditional IPO, it takes around 2 years due to roadshows and lengthy SEC registration process. Though gaining popularity recently, SPAC isn’t entirely a new thing. SPAC was first seen in the US after the penny stock scandals in the 1980s like we saw in The Wolf of Wall Street. Serial securities act reforms in the 90s made IPO more challenging, and we have seen the first SPAC-like company after. This idea did not draw too much attention back then, but when the private equity and hedge funds gained popularity after 2003, retail investors with limited capital also wanted a cut in the M&A-related opportunities. SPAC is a vehicle that allows retail investors to do so. We have seen more activities in the late 2000s, but the real hike didn’t start until 2020. Because of the pandemic, the volatility in capital markets significantly increased, and underwriters are turning more conservative. This makes traditional IPO even more challenging and costly, and many companies turn their way towards SPACs. Alongside, on top of the stimulus money injection, the pandemic evidently discouraged people from spending, and a lot of the capital from retail investors poured into the US capital market. Essentially, SPAC is a technique that meets two ends of needs: people who have the money and people who have the businesses. There’s no other capital market like the one in the US that has such high liquidity. Combining the easiness of SPAC fundraising and the traditional IPO timeline and cost, this may be another reason for SPACs’ glory in the US.
In What Kind of Environment Was SPAC First Born
Some people may find it interesting that SPAC was invented due to tightened regulations for traditional IPO. Essentially SPAC offers a quicker way to the public market and at the same time a mechanism to bypass some traditional IPO challenges. While the US government tried to tighten the regulation for IPO to better protect investors, why at the same time allowing SPAC that seems to be able to cheat? As the structure of SPACs seems engineered to attract fraud in nature, I guess beyond the minimum exchange listing standard, the key question is how transparent SPACs can be during the life cycle and beneath it how strong the corporate governance is, as they directly tie to the confidence level of stakeholders involved and down the line the government’s comfort level for SPACs. For the US, there are several ongoing reporting obligations that SPACs must comply with. Starting with the prospectus, SPACs are required to disclose not only financial data but also risk factors, cautionary notes regarding forward-looking statements, use of proceeds, dilution, capitalization, proposed business, management team, principal stockholders, and many more. Beyond the prospectus, SPACs are also required to comply with regular filings such as the 8-Ks for major events and 10-Ks and proxies, information, or tender offer statements. The SPACs proceeds are also placed in trust accounts, and investors have the right to vote down a deal and are given redemption rights in cases that they do not buy in the majority shareholders’ consensus. While the disclosure requirements are easy to copy, the underlying ecosystem and corporate governance are not. After all, Rome wasn’t built in a day.
Are SPACs Suitable for Taiwan?
For Taiwan, the government has been trying to breed more local unicorn companies, but we haven’t seen good results besides Appier, Gogoro, and 91APP who recently went IPO. Perhaps allowing SPACs can accelerate this process. But why haven’t we seen SPACs in Taiwan yet? From a regulation point of view, Taiwan has a relatively strict regulatory framework concerning public companies. For companies that wish to list on TWSE or TPEX, the current standards by the two exchanges have strict requirements on company size, the age of the company, ownership diversity, and profitability. Blank check companies like SPACs could bypass those standards when merging with target companies that would not qualify for IPO otherwise. In a small market like Taiwan, the stricter the current regulation is the more incentives SPACs can attract fraud. But again, the bottom line is not about the regulation itself, but more about the ecosystem beneath it — how well-rounded the capital market is and corporate governance. Thus, before rushing to ease the capital market regulation and IPO standards, we also have to take a step back to look at our corporate governance in Taiwan. As anyone might expect, transparent disclosure and solid mechanisms that protect investors’ interests are easier to copy, but a well-rounded ecosystem and corporate governance beneath them need time to evolve. After all, we have had enough so-called “egg and dumpling stocks” (stocks constantly trading below book value that investors can buy those stocks with their grocery budget) and “zombie stocks”(companies that have poor performance and the stocks also lack liquidity in the public market) that the government has to deal with. Before either saving those stocks through market-making or delisting, a new mechanism like SPAC does indirectly increase the risk for more of these companies.
Alongside the capital market itself, there are also some improvements Taiwan can make on the corporate governance part. Peer reviews done by local and international specialists have concluded some challenges regarding corporate governance that Taiwan’s environment is facing. First of all, there is still room for improvement regarding the board’s independence. Compared to some other developed countries in Asia, Taiwan can still improve on the weight of independent directors in the boards as well as their length of service. It also takes time for independent directors and the audit committees to strengthen their presence and influence in the companies. Secondly, international investors are paying more attention to company ESG. Thus, regarding information disclosure, Taiwan should encourage companies to focus more on ESG and improve the quality of such disclosure. Furthermore, public companies are given 3 months to disclose their annual financial report compared to 60 days in the US. The window is considered a bit too long for investors to act on the information. This could be another topic that can strengthen Taiwan’s corporate governance. Regarding shareholder participation, there has been some controversy lately that some companies delay the issuance of proxy votes or even manipulate the shareholder proxy vote data. Investor conferences also prioritize institutional investor participation instead of retail investors. All of these are areas that Taiwan can improve on to strengthen its corporate governance and capital market ecosystem before we make ourselves ready for something like SPACs.
All for All
After all, bringing SPACs into Taiwan isn’t as easy as simply revising regulation standards. With SPACs gaining popularity and attention around the world, there are voices in Taiwan questioning the status quo. As a result, earlier in March, the Financial Supervisory Commission requested TWSE to study the feasibility of SPAC in Taiwan. The feasibility report should be out any time soon, but considering the current regulation and corporate governance in Taiwan, SPAC is probably not suitable at least in the very near future. Hopefully down the line as Taiwan’s corporate governance and capital market ecosystem strengthen, we will see some mechanism like SPAC that helps startups gain faster and easier access to the public market while guarding the public interest.
Further Reading
From a process perspective, SPAC is essentially another form of a reverse merger but with some other benefits. In reverse mergers, the legal acquirers are usually companies stuck in stagnant, and there are typically issues such as debt and existing operations that the management of newly merged companies have to deal with. Compared to traditional reverse mergers, SPACs are much cleaner blank check companies with no existing operation or sizable debt. But after all, SPAC is still another form of a reverse merger. It’s hard not to think about the reverse merger crisis back in the 2000s. In another post: Can SPACs Avoid Another Reverse Merger Crisis, I discussed how SPACs really work and the benefits and risks associated with them. I hope it can provide a better picture of this old friend who seems new.
Source:
Taiwan Financial Supervisory Commission
Business Today
U.S. Securities and Exchange Commission
Taiwan National Policy Foundation
Technews Taiwan
