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As global markets continue to recover in the wake of the COVID-19 pandemic, and as the groundswell of retail investor participation in equities reaches fever pitch (see our series on the GameStop saga), market sentiment in the US appears to be placing increasing confidence and interest in a recycled, alternative investment vehicle structure known as a special purpose acquisition company (SPAC). 

In essence, a SPAC is a shell company with no underlying operating business or assets, which is formed by a sponsor or promoter, and undertakes an initial public offering of its shares to investors. The SPAC raises a war chest of funds from investors and lists on a stock exchange, with the sole purpose of acquiring or merging with a private business consistent with SPAC’s investment objectives at a future date. Typically, the SPAC touts the experience and skill of its directors and management. As such any investment in the SPAC is ultimately an investment in the ability of those individuals. 

In 2020, SPACs generated excessive interest in the US, with around 250 SPACs listing on US stock exchanges, raising a total of approximately AUD$93 billion. SPACs backed by celebrities such as Serena Williams, Jay-Z, and Shaquille O’Neal have garnered so much interest that the US Securities and Exchange Commission issued an investor alert, explicitly stating, “it is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.”

SPACs bear a striking resemblance in concept to cash box companies that flourished on state-run securities exchanges in Australia leading up to the 1987 share market crash. As a result, the ASX Listing Rules implemented protections to effectively prohibit the re-emergence of cash box entities. Some market commentators have drawn parallels between the bubble-esque conditions of the 1980s that gave rise to these vehicles, and the increasing popularity of SPACs today.

In this article, Partner, Michele Muscillo discusses the ASX Listing Rule regime as it applies to SPACs. 

ASX Listing Rules

ASX’s policy of prohibiting cash box entities is entrenched in a number of Listing Rules. Specifically, these include:

Requirements for ASX Listing – Chapter 1 

1. (Listing Rules 1.1 Condition 1, and Listing Rule 12.5) an entity’s structure and operations must be appropriate for a listed entity. ASX Guidance provides examples of where an applicant may not have an appropriate structure and operations, and includes where:

• the applicant has a vague or ill-defined business model or its business operations do not appear to ASX to have any substance; 
• the applicant’s proposed business is little more than a concept or idea; and
• the applicant has not yet secured the key licences, government approvals, intellectual property rights or other property or rights it will need to operate its business.

At the time of applying for admission, it is likely that ASX would form the view that a SPAC would have no substantive business model, and does not possess the relevant licences and approvals to operate a business it is yet to acquire. It is therefore unlikely that ASX would be satisfied that a SPAC has an appropriate structure and operations to list.

2. (Listing Rules 1.1 Condition 9 and 1.3) under the assets test, an entity that is not an investment entity must either have:

• less than half of its total tangible assets (after raising any funds) as cash or in a form readily convertible to cash; or
• commitments consistent with its business objectives to spend at least half of its cash or and assets in a form readily convertible to cash. 

This test, coupled with ASX guidance on what is considered to be a commitment, is diametrically opposed to the nature of a SPAC, whose purpose is to maintain a liquid pool of cash in order to acquire or a merge with, and subsequently list, an existing business. 

Ongoing requirements – cash box prohibition and change to activities

3. (Listing Rule 12.3) Listing Rule 12.3 provides that (except for certain financial institutions, mining exploration entities or oil and gas exploration entities), if half or more of an entity’s total assets is cash or in a form readily convertible to cash, ASX may suspend quotation of the entity’s securities until it invests those assets or uses them for the entity’s business. 

The accompanying note explicitly states that this rule, and Listing Rule 1.3.2 (the assets test), prevent the listing or continued quotation of cash box entities.

4. (Chapter 11) Listing Rule 11.1 was originally inserted to regulate backdoor listings, in which a private company vends in to a listed shell, and typically requires such transactions to obtain shareholder approval, and in some instances, re-comply with the admission requirements in Chapters 1 and 2. 

In the unlikely event that a SPAC satisfies the admission requirements and becomes listed on ASX, the acquisition by the SPAC of an unlisted company would be captured by the backdoor listing requirements in Chapter 11. The requirements under Chapter 11 would likely require re-compliance by the SPAC, during which time its securities would likely be suspended, which is a further deterrent to proceeding with a SPAC structure. 

Investment entities

As distinct from a SPAC, an investment entity is defined under the Listing Rules to be an entity whose, in ASX’s opinion, principal activities consist of investing in listed or unlisted securities, and whose objectives do not include exercising control over or managing any entity, or the business of any entity, in which it invests.

The typical structure of a SPAC is unlikely to fit the definition of an investment entity, as a SPAC will usually acquire the entire issued capital of an unlisted company, and subsequently, control and manage its business.

SPACs have a number of potential advantages. They are more accessible to retail investors, allowing individuals to participate in venture capital and start-up investments at the ground floor, rather than being superseded by institutional investors. SPACs also provide flexibility for unlisted entities wishing to gain exposure to liquidity in listed markets. In addition, at least in the US, SPACs are able to navigate the admission and listing requirements more efficiently due to a far simpler corporate structure at the time of listing. 

However, there is significant risk associated with what is essentially a blind investment in a SPAC, and investor funds can be escrowed for up to two years without an acquisition or merger occurring. It is for these reasons that a significant policy overhaul would be required for ASX to consider the facilitation of the admission of SPACs to the Official List.

Some SPAC structures afford certain investor protections, including redemption rights and approval provisions, however the potential benefits of SPACs must be balanced against the risks, as well as the responsibility to maintain the integrity of the market and protect of retail investors. 

Given the very clear and deliberate listing conditions which prevent SPAC-type structures listing on the ASX, it appears that substantive changes to the Listing Rules would need to be made before ASX would ever consider the return of the SPAC to the Official List.

If you require further advice, please contact our Corporate Advisory and Governance team.