In tandem with the upcoming IPO of Reach Energy Berhad, a Special Purpose Acquisition Company (SPAC), this post attempts to address the lack of understanding on SPAC.
What is SPAC
- Basically, SPAC going for IPO is a shell company with no operation or income generating business raising fund from public to acquire operating companies or assets, known as Qualifying Acquisition (QA).
- Below are the comparisons between a SPAC and an existing company going for listing:-
- Investment in SPAC has higher risk since the performance and financial of the business cannot be evaluated compared to existing company going for IPO. Thus, the key investment theme for SPAC is the experience of its management team to pursue the business strategy and complete QA.
- Currently, there are only three listed SPACs on Bursa Malaysia which are Hibiscus, Cliq Energy and Sona Petrolium.
- According to The Edge (19 Dec 2013), the proposal to list two SPACs in the mining sector i.e Australaysia Resources and Mineral Berhad and Terragalli Resources has been rejected by Securities of Commissions due to the doubt of the returns would commensurate with the risk of investors.
SPAC Structure
- Investors in SPAC typically buy a unit of the SPAC shares (mother share) and receive a warrant which is only exercisable when the SPAC completed the QA. Both of the SPAC shares and warrant will be traded separately.
- A SPAC going for listing made up of three types of shareholders which are the management team, pre-IPO investors, and the IPO investors. Note: retail investors/ public are classified under IPO investors.
- The restriction and entitlement for each type of shareholders are as below:-
(Source: Securities Commissions)
SPAC is a high risk and high return investment. The completion of Qualifying Acquisition which is commercial and financial viable is the key success of a SPAC. However, in the event of a SPAC fails to complete Qualifying Acquisition within 3 years, the SPAC will be liquidated and delisted.
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