Ms He Ting Ru asked the Prime Minister (a) what are the steps being taken to educate and protect retail investors of Special Purpose Acquisition Companies (SPACs) given the risks associated with investing in such companies; and (b) whether the Government will consider restrictions on retail investors’ access to the initial public offering of such companies.
Mr Tharman Shanmugaratnam (for the Prime Minister): The Singapore Exchange’s (SGX) listing framework for SPACs includes safeguards to protect investors’ interests against the risks posed by the unique features of SPACs. The framework was introduced after an extensive public consultation with a range of stakeholders, including market professionals, industry associations, members of the public and potential SPAC founders.
SPACs provide an alternative capital-raising avenue for enterprises, offering them faster time-to-market while providing investors with access to early stage investments typically available only to professional investors. Unlike a traditional company, a SPAC has no prior operating history or revenue-generating businesses at the time of listing. The SPAC’s founding shareholders (typically referred to as the sponsors) will use the capital raised to acquire an operating business within a specified period of time. Investors would typically invest in a SPAC IPO based on their assessment of the SPAC sponsors’ ability to identify and acquire a good quality target company. Once a target company is identified, SPAC investors get to vote on whether the acquisition should be made.
The characteristics of SPACs could pose a number of specific risks to investors. First, sponsors may push ahead with a less than ideal acquisition in order to be entitled to fees for completing the acquisition. Second, investors’ interests could be unduly diluted if the sponsor’s fees, which typically take the form of shares in the SPAC, are excessive. Third, warrants that are issued alongside IPO shares may also cause further dilution for investors.
In view of these risks, SGX’s SPAC framework has a number of safeguards. In fact, in a number of areas, SGX has imposed stricter requirements than other jurisdictions with SPAC frameworks. For example:
(a) sponsors have to maintain a minimum level of equity participation in the SPAC;
(b) sponsors have to retain their shareholdings until at least six months after acquisition;
(c) in putting the acquisition of the target company for approval by the SPAC’s shareholders, the sponsors are prohibited from exercising the voting rights attached to shares obtained from their fees; and
(d) there are hard caps on the amount of shares that sponsors may receive and on the maximum dilution that can arise from warrant issuances.
In addition, SGX has partnered with the Securities Investors Association (Singapore) (SIAS) to ensure that independent research on the target company will be made available to investors when a SPAC puts forward an acquisition proposal. Investors will need to decide whether to vote for the acquisition to take place, and if the acquisition proceeds, whether to redeem their shares or to remain invested. The research reports will help investors analyse the various scenarios, the courses of action available to them, and the related factors to consider.
SGX has also been mounting education efforts to help retail investors develop a better understanding of the key features and risks associated with SPACs. These efforts include collaborating with SIAS to conduct online webinars, making available comprehensive educational materials about SPACs on the SGX website, and working with various stakeholders to put out educational articles, including on social media platforms.
Ms He also asked if restrictions should be placed on retail investors’ access to SPACs’ IPOs. This is a balance that we always consider in regulating the capital markets, and it depends on the overall risks and safeguards. The various regulatory safeguards and educational efforts outlined above should provide adequate protection for retail investors and enable them to assess the risk-return trade-offs and make informed investment decisions.
Restricting retail participation in SPACs, which goes beyond the afore-mentioned safeguards in SGX rules, will curtail retail investors’ access to new investment opportunities. It may also have unintended effects – for instance, investors may seek out unregulated alternative investments and take on even more risks.
We will continue to assess if any of the safeguards need to be adjusted over time. Investors, on their part, should ensure they understand the unique features and risks of SPACs, and carefully assess whether SPACs are suited to their risk appetite and investment objectives before investing.
Prime Minister’s Office
15 February 2022