By Marc H. Iyeki, Senior Consultant Global Markets Advisory Group LLC.
The US capital market is the deepest and most prestigious in the world, attracting companies that aspire to distinguish themselves from their local peers and stand among the world’s best. Only a select group of companies can meet the challenge of being a US-listed public company. Members of this group gain access to benefits that are largely unavailable to companies that stay within the comfort zones of their local markets.
For decades, the process for going public in the US was basically one size fits all, and that size was the IPO. Many prominent and cutting-edge tech Chinese companies have taken this well-known path, and many deep-pocketed US investors have welcomed them.
Today, a company seeking to go public in the US can select from multiple processes, provided it meets US securities registration requirements and relevant stock exchange listing qualifications. Here’s a broad-brush description of these processes:
a. Traditional Initial Public Offering (“Traditional IPO”) – An underwriter-led process whereby a private company goes public by offering new shares in the public market.
b. Special Purpose Acquisition Company (“SPAC”) – A two-step process whereby a sponsored blank-check company called a SPAC: 1) goes public via an underwritten IPO and 2) merges with a private operating company (“Target Company”), resulting in formation of a publicly traded initial business combination.
c. Direct Listing – A process whereby a private operating company, without underwriters, goes public by offering: a. only existing shares in the public market. or b. new shares or a combination of new shares and existing shares in the public market.
Each of the three processes has its own unique features. A company seeking to go public in the US should choose the one most suitable for its own needs and circumstances.
Regardless of which path is chosen, from the moment the opening bell rings, a newly listed company must be ready to think, act, and be a publicly traded company. That’s easier said than done, but as many Chinese companies have shown, it can be done – and done successfully - with advanced planning.
Of the three listing processes, interest in SPACs has skyrocketed and now rivals the Traditional IPO in popularity. In fact, over the last 14 months ending February, there have been about 654 SPAC IPOs raising over $170 billion. During the same 14-month period, there have been about 415 Traditional IPOs raising about $144 billion.
Once viewed as a vehicle to enable shady financiers to take unworthy companies public, SPACs today generally have higher quality sponsors, investors, underwriters and law firms than in the past. This evolution has elevated the SPAC’s credibility as an IPO alternative. Potential sponsors, institutional and retail investors, as well as private companies worldwide have taken notice.
In February 2022, a select list of SPACs backed by Asian or MENA sponsors that are in-the-pipeline, searching, or have recently announced or completed a merger, include: Citic Capital Acquisition ($240 million IPO/completed), SC Health ($150 million/completed), Vistas Media Acquisition ($100 million/completed), AGBA Acquisition ($40 million/announced), Artisan Acquisition ($339 million/announced), Bridgetown 2 Holdings ($299 million/announced), Bridgetown Holdings, ($595 million/searching), Fat Projects ($100 million/searching), Malacca Straits Acquisition ($125 million/searching), Primavera Capital Acquisition ($360 million/searching), Bridgetown 3 Holdings ($200 million/filed), Cedarlake Acquisition ($200 million/ filed), Atlas Growth Acquisition ($100 Million/filed), and SHUAA Partners Acquisition ($100 million/filed).
Within the past six months, among the Southeast Asian and MENA Target Companies that have announced or completed deals to go public via merger with a SPAC, are: Anghami (completed), GRAB (completed), ReNew Power (completed), ETAO International (announced), Gogoro (announced), Prenetics (announced), and PropertyGuru (announced).
As more internationally-backed SPACs are created and more US SPACs expand their searches overseas, opportunities for international Target Companies seeking a US listing via SPAC merger are expected to increase.
What can Target Companies do to prepare for engagement with a SPAC and for public company status on the NYSE or NASDAQ? Based on personal observations and on recent comments by the US Securities and Exchange Commission, the following points would be a good start:
• Preparations for going public via SPAC merger are the same as for going public via IPO – except that the SPAC process, which is shorter than the IPO process, gives Target Companies less time to prepare.
• To gain extra preparation time, Target Companies should begin public company readiness activities well before engaging with potential SPAC suitors. For SPACs, ideal Target Company candidates are those that have already begun IPO preparations and are open to a SPAC merger.
• A SPAC will likely bypass a Target Company that does not have auditable financial statements. This is because it can take months to audit even “audit-ready” financial statements. In addition, the financial statements must be audited in accordance with Public Accounting Oversight Board (“PCAOB”) standards by a PCAOB-registered auditor that is compliant with PCAOB and SEC independence requirements.
• The SEC recently said that, at minimum, a Target Company should have a “clear, comprehensive plan to be prepared to be a public company.” The “company should also evaluate the status of various functions, including people, processes, and technology, that will need to be in place to meet SEC filing, audit, tax, governance, and investor relations needs post-merger.”
As for a business combination resulting from a SPAC merger, the SEC stated it is essential to “have a capable, experienced management team that understands what the reporting and internal control requirements and expectations are of a public company and can effectively execute the company’s comprehensive plan on an accelerated basis.”
As for a cross-border SPAC merger, the resulting business combination should early on consider whether its corporate structure is compatible for listing in the US, and whether there are complex tax scenarios from a transaction involving entities based in multiple tax jurisdictions.
And since the new SEC Chairman, Gary Gensler, has ramped up scrutiny of SPACs, close monitoring of SEC statements regarding the SPAC process – such as to the accounting treatment of warrants - has become an absolute necessity.
Last but not least, is the “elephant in the room,” which is the ongoing “audit working papers” dispute between China and US. In December 2020, the Holding Foreign Companies Accountable Act - which calls for the delisting of any US-listed Chinese company whose audit working papers are not inspectable by the PCAOB for three consecutive years – became law. Some Chinese companies listing in the US have auditors whose audit working papers are inspectable by the PCAOB – but most do not. While obviously harsh, the HFCA is also obviously designed to give parties time to reach a negotiated solution.
A negotiated solution is not guaranteed, yet is not beyond reach. Fang Xinghai, Vice Chairman of China Securities Regulatory Commission (“CSRC”), has reportedly previously said that PCAOB’s demands to examine the audit papers of Chinese companies listed in the US are “completely reasonable.” He stressed that CSRC will unswervingly promote China-US financial cooperation, and that a solution will be reached if both parties negotiate in good faith.
In the meantime, US regulators continue to move forward with implementation of the HFCA Act, even as they commence negotiations with their Chinese counterparts over auditor oversight issues. As long as discussions remain focused on regulation, there is a way forward for a win-win solution.
About the Author:
Marc H. Iyeki has over 30 years of experience in the financial industry, having previously worked at the New York Stock Exchange, holding roles such as Head of Asia Pacific Listings, Chief Representative – Beijing Office, and Trial Counsel. He was also an Independent Board Director at Vistas Media Acquisition Company. He currently is a Senior Consultant with Global Markets Advisory Group, and Senior Advisor (biotech & innovation) to Deltec Investment Advisory Ltd. He advises on IPOs, SPACs/De-SPACs, Uplistings, and post-listing matters.
Marc attended Austin College, earned a B.A. in economics from Washington University in St. Louis, attended the master’s degree program in public policy analysis at the University of Pennsylvania, and earned a J.D. from the New York University School of Law.