BusinessDay

SEC issues new rule on Special Purpose Acquisition Companies

…also amends rule on Time for Processing

The Securities and Exchange Commission (SEC) has released its new rule on Special Purpose Acquisition Companies (SPACs) as well as sundry amendments to SEC NG rule 3(6)(b)- Time for Processing.

Special Purpose Acquisition Company means a public company with no commercial operations that is formed strictly to raise capital through an initial public offer (IPO) for the purpose of acquiring an existing company.

Justification for the new rule on SPACs

“Special Purpose Acquisition Companies (SPACs) offer alternative investment opportunities for the investing public. It is thus crucial to ensure that this vehicle operates in a manner consistent with investor protection, public interest, market integrity and transparency.

“Like other PLCs growth process, regulatory approvals are required by SPACs at critical junctures –example at capital raise, listing, business combination/acquisition etc. As public companies, SPACs come under existing relevant laws and regulations, as currently provided for under the ISA, hence the need to incorporate SPAC specific requirements proposed hereunder in the Commission’s rules and regulations”, the SEC said.

Among others, the SEC in its new rule said a SPAC IPO issue size shall not be less than N10 billion, adding that the promoters shall hold at least 15percent and not more than 20percent of the post issue paid up capital, provided that the promoters shall also have aggregate subscription of all securities in terms of amount in the SPAC prior to or simultaneous to the IPO amounting to at least 2.5percent of the issue size.

“Notwithstanding the minimum requirement prescribed above, a SPAC shall demonstrate that the gross proceeds to be raised from the IPO would be sufficient to undertake a qualifying acquisition which will: Enable the SPAC to have a core business with sufficient size and scale relative to the industry in which the business operates; and offer returns to investors based on the equity capital to be deployed relative to industry returns”.

On the pricing, the SEC new rule states that a SPAC issue shall be through a fixed price mechanism and the issuer shall determine the price in consultation with the lead issuing house.

Read also: SEC sees tech innovations enhancing capital market efficiency, transparency

Here are some of the new rules on SPACs

Underwriting

In addition to the general rule on Underwriting, the following shall apply: Where the issue is underwritten, adequate disclosure regarding the underwriting arrangements shall be made in the offer document. Payment of at least 50percent of the underwriting commission shall be deferred until successful completion of the business combination. The deferred amount shall be deposited in an escrow account. In the event of liquidation, the underwriter shall waive their rights on the deferred commission held in the escrow account

Offer Period

The IPO shall be open for at least three (3) working days and not more than ten (10) working days.

Subscription and Allotment

The minimum subscription size of a SPAC IPO shall not be less than N25 million; for a SPAC offer to be successful, it must: be at least 75percent subscribed; have a minimum of 50 subscribers; no single subscriber shall be allotted more than 10percent of the post issue capital and the allotment to investors shall be on a proportionate or discretionary basis as disclosed in the offer document. The issuing house shall ensure that allotment proposal is filed with the Commission within 5 working of the close of the offer. The issuing house shall ensure that monies from rejected applications and surplus return monies are returned to investors in line with the provisions of the Commission’s Rules and Regulations on the treatment of return monies.

Utilization and Management of Proceeds

The net proceeds shall: only be utilized for the purpose(s) stated in the approved offer documents; be domiciled in an interest bearing escrow account opened and maintained specifically for that purpose with a Custodian; The issuer and lead issuing house shall be the signatories to the escrow account; at least 90percent of the gross proceeds of the IPO shall be deposited in the escrow account not later than 24 hours after approval of allotment; the proceeds shall be held in the escrow account until consummation of the qualifying acquisition or liquidation; the escrowed funds shall be invested only in short-term fixed income investment grade liquid instruments as disclosed in the offer document; the offer documents shall disclose how the amounts deducted from the gross proceeds raised will be utilized.

Prior to the completion of the qualifying acquisition, proceeds from the initial public offering that are not placed in the escrow account shall not be utilized for payment of remuneration whether directly or indirectly to members of the management team of the SPAC or their related parties, including but not limited to: salaries, consulting fees, management contract fees, director’s fees, finder’s fees, loans, advances, bonuses, deposits or similar payments. The interest and other income derived from the escrowed funds may be utilized by the SPAC for the following purposes: Payment of taxes; General working capital expenses, subject to prior approval by way of special resolution of the shareholders, other than the promoters

On the sundry amendments to SEC NG rule 3(6)(b)- Time for Processing, SEC said the proposed amendment supports the Commission’s efforts in reducing time-to-market. It noted that a reduction in the processing time window will make the Commission’s processes more efficient. “By so doing, only serious applicants who are willing to comply with registration requirements will file with the Commission and instances of dumping applications with the Commission would be reduced”, SEC said.

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