Could SPACs make a comeback?

SPAC is back. An investment vehicle that was lustreless for years is now hot again in the US, and this enthusiasm for special purpose acquisition companies (SPACs) is spreading to other parts of the world.

Asia may well be ripe for a SPAC boom, given its lively startup scene and big appetite for initial public offerings (IPOs). If so, let us hope that Malaysia's lessons from the past will not get trampled in the rush for returns.

In 2009, the Malaysian capital market was revamped with the launch of a new framework for listings and equity fundraising. I was on the business desk of a daily newspaper back then; when I was writing about these reforms, the one that intrigued me the most was the introduction of rules for the listing of SPACs. It had been four years since Malaysia last extended its range of equity products, and this shiny new object seemed so promising.

Widening the market

In a May 2009 joint media release to announce the capital market makeover, the Securities Commission (SC) and Bursa Malaysia explained that SPACs were 'shell companies without operations that go public with the intention of merging with or acquiring operating companies or businesses with the proceeds of their IPOs'.

The aim was to increase the breadth and depth of the country's capital market. The listing of SPACs, said the SC and Bursa Malaysia, would promote private equity activity, which in turn would spur corporate transformation and encourage mergers and acquisitions.

Malaysia was the first country in Asia to allow the listing of SPACs. South Korea did the same by amending the law several months later.

Blank-cheque companies

To the newsman in me, it was exciting that we would have these 'blank-cheque companies' pooling funds from investors, chasing deals and metamorphosing overnight into established businesses. And then reality happened.

Only five SPACs have been listed in Malaysia, the first in July 2011 and the last in December 2015. Each was given three years from the date of listing to complete a qualifying acquisition (QA), which would convert it from a SPAC to a company with full-fledged operations.

Two have managed to secure regulatory and shareholder approvals for their QAs and are now oil and gas companies. For different reasons, the other three SPACs could not meet their deadlines and have been liquidated, with the shareholders receiving a minimum of 90% of the funds collected from the listing exercises.

IPO safeguard

This modest track record is disappointing because SPACs have done little to expand the Malaysian capital market, but it is of some comfort that the rules have been proven to adequately safeguard the IPO proceeds.

The real problem with the SPACs experience in Malaysia was the highly speculative trading of their shares and warrants, which were issued free as IPO sweeteners.

SPAC securities were often among the most active counters and it could only be because many people believed that a QA was imminent, even if there were no such announcements. Yes, there will always be some degree of stock market speculation, but when there is zero public information to support significant buying and selling, all we have is froth and manipulation. This cannot be the way to widen and deepen our capital market.

Overvalued shares

An article in a 2010 publication by the Korea Capital Market Institute reported that a large proportion of investors in SPACs were individuals. According to the writer, this had led to overvaluation of the SPAC shares and fluctuations in their prices.

Malaysia and South Korea are still the only Asian countries where SPAC IPOs are possible. However, encouraged by the large number of such new listings in the US last year and in the first few months of this year, places like Japan, Hong Kong, Singapore and Indonesia are looking at jumping on the bandwagon.

Maybe it is indeed the right time for SPACs to be market catalysts. One thing for sure is that their introduction will test the maturity and sophistication of retail investors.