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The Rise of SPAC in Asia

June 2021
 The Rise of SPAC in Asia

Executive Summary
Although special-purpose acquisition companies (SPACs) have been used for decades as alternative investment
vehicles in United States ("US"), they have recently come into vogue as seasoned investors and management teams
have turned to SPACs to mitigate the increased market volatility risk of traditional initial public offerings (IPOs). In
fact, 2021 has been a record-breaking year for US SPAC IPOs; the proceeds raised in the first quarter of 2021 have
already became more than those raised in 2020. This surge has been driven by the influx of high-profile investors
and management teams entering the SPAC space, coupled with an abundance of uninvested capital that had largely
been sitting out in 2020.

Given market developments in US SPACs listings in recent years and potential merger and acquisition opportunities
in the Asia Pacific region, both Hong Kong and Singapore received increasing market interests to introduce SPACs in
their capital markets.

However, SPAC transactions come with their own set of unique challenges, and it is essential for entities to have (1)
an understanding of the risks associated with these investment vehicles and (2) a comprehensive project
management plan to meet the demands of an accelerated merger timeline.

Themes of this publication:

 Background — A brief look into the past and present of SPACs, including this year’s record-breaking pace.
 Rise in SPAC Use — An examination of the conditions and trends driving the momentum of SPACs in 2021.
 Life Cycle of a SPAC — An overview of the life cycle of a SPAC, from inception through the consummation of a
merger.
 Managing Ongoing Operations — A survey of the core competencies that should be examined and elevated after
a target company is acquired.
 Momentum of SPAC in Asia — An overview of the recent development of SPAC in Asia.
 Considerations for Targets — SPAC versus traditional exit options.

Recent market volatility, combined with the arrival of seasoned sponsors and management teams, has created a
modern-day SPAC revolution. The abundance of funds held in trusts and the increased appetite for private
investment in public equity (PIPE) transactions have thrust SPACs beyond the fringe of capital markets and into
the mainstream as significant players for potential sponsors, investors, and target operating companies.

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 The Rise of SPAC in Asia

Background
Introduction
A SPAC is a newly created company that uses a combination of IPO proceeds and additional financing (PIPEs have
been common in recent times) to fund the acquisition of a private operating company. The proceeds raised in the
IPO are placed in a trust account while the SPAC’s management team seeks to complete an acquisition of an existing
operating company (“target”), generally in a specific industry or geography, within the period stated in the SPAC’s
governing documents (typically, 18 to 24 months). If the SPAC successfully completes an acquisition, the private
operating company target succeeds to the SPAC’s public filing status and, as a result, the target effectively becomes
a public company. If the SPAC is unable to complete an acquisition in the allotted timeframe, the cash held in its
trust account is returned to its investors unless the SPAC extends its timeline via a proxy process.

Past and Present

Entities with characteristics similar to those of SPACs have existed for decades in various iterations as “blank check
companies” or “public shells.” The term “SPAC” was coined in the 1990s, with sponsors focusing on the technology,
media, and health care industries in US. Since then, the popularity of SPAC offerings has ebbed and flowed,
depending on economic conditions, trends in capital, and the general health of the IPO market. For example, US
SPACs gained popularity in the oil and gas industry in the mid-2010s as depressed commodity prices drove investors
toward experienced management teams that were increasingly likely to find existing operating companies or
mineral rights for a discount. The number of US SPAC IPOs has increased steadily since 2013, and 2020 has been a
banner year in terms of the volume and size of US SPAC IPOs.

US SPAC IPO Issuances Since 2013

Year Amount Raised ($ in billions) Number of IPOs Average Size ($ in millions)

2021 (to date) 106.5 339 314.0

2020 83.3 248 336.1
2019 13.6 59 230.5
2018 10.8 46 233.7
2017 10.0 34 295.5
2016 3.5 13 269.2
2015 3.9 20 195.1
2014 1.8 12 144.9
2013 1.4 10 144.7
Data source: SPACInsider as of June 13, 2021.

This momentum is not showing any signs of slowing down, and the first five months of 2021 have already been filled
with landmark US SPAC records, including:

 The highest number of US SPAC IPOs in a year (339).

 The highest amount of US SPAC proceeds raised in a year ($106.5 billion).
 The 2nd highest average US SPAC IPO size in a year ($314.0 million).

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Rise in SPAC Use

The increase in the use of SPAC as alternatives to traditional IPOs is the result of a confluence of factors. First,
unspent committed capital, or “dry powder,” held by private equity was estimated to be near $1.45 trillion, which
bolstered the supply of capital that had mostly been sitting on the sidelines 2021.

Second, while pricing for a traditional IPO is affected by market volatility and broader investor sentiment, which can
vary significantly leading up to the time of pricing, SPAC mergers provide more certainty because of up-front pricing
and valuation that is in large part determined through negotiations that typically occur months before the
transaction closes. The recent rise in market volatility, which is largely attributable to the coronavirus disease
pandemic, has therefore prompted some companies to forego the traditional IPO route for the up-front price
discovery and potential accelerated timeline offered by a SPAC transaction. Furthermore, SPAC mergers give
sponsors the opportunity to raise additional capital through PIPEs to finance a significant portion of the target’s
acquisition price and to provide post-merger operating cash.

As the use of SPACs increased, a number of well-known investors and hedge fund managers entered the SPAC
space, and some high-profile SPAC acquisitions lent credibility to the structure as a reputable investment vehicle. In
many cases, these sophisticated sponsors have remained involved with the target company to provide ongoing
support after the merger was consummated. The influx of seasoned managers with proven track records, coupled
with better alignment of sponsor incentives with investor returns, has increased investor confidence in SPACs,
enabling them to raise significant capital to be used in targeting larger and more mature companies. In addition, the
SPAC market has benefitted from the entrance of retail investors that have looked toward post-IPO SPACs as a
means of finding suitable returns in the recently volatile market.

Life Cycle of a SPAC

A SPAC’s life begins with its initial formation, followed by its IPO, its search for a target, a shareholder merger vote,
and, finally, the close of an acquisition (or the return of the SPAC’s proceeds to investors). The SPAC process differs
from that of a traditional IPO in that the target company (which eventually becomes the public company post-
acquisition) is not involved in the formation of the SPAC or the IPO phases. However, the terms of the units offered
in a SPAC IPO and the agreements the SPAC has with its sponsor and management team ultimately influence the
value that target company investors extract from a SPAC merger.

The phases of a SPAC’s life cycle are outlined below.

Target Search Shareholder Vote Acquisition

Formatio IPO
Close
n

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Formation
When a SPAC is launched, the sponsor, and often its management Key Terms
team, pays a nominal amount for an equity stake in the SPAC, Sponsor — Founding investors that lead the
which is often referred to as “founders’ stock” or the “promote.” SPAC process.
The founders’ stock that the initial investors receive generally
represents approximately 20 percent of the stock in the SPAC after Target — Private company that is the target
its IPO. The founders’ stock is intended to compensate the initial of an acquisition and ultimately becomes a
investors for identifying a promising target and consummating a public company after the merger is
merger. During this stage, the sponsor typically lends the SPAC consummated.
money to fund ongoing expenses. In addition, the SPAC selects
legal counsel and underwriters and establishes its governing De-SPAC — The process that begins after a
documents. letter of intent is executed and ends when
the shareholders approve the transaction
IPO and the merger into the SPAC is
consummated.
After formation, a SPAC begins the process of making its public
offering. At this point, the SPAC files an initial registration
PIPE — A means of raising additional capital
statement with the SEC and responds to SEC comments. The SPAC
after a target is identified to finance a
then raises capital by issuing units (which individually consist of a
significant portion of the acquisition price.
common share and a warrant2), and the proceeds raised are held
in a trust until a target is acquired. After the IPO, the units are
Lock-up period — The period after an IPO in
separated into shares of common stock and tradable warrants. The
which certain shareholders are restricted
warrants are designed to provide additional compensation for the
from selling shares. The lock-up period for a
initial investment and are usually exercisable shortly after a merger
SPAC IPO is typically longer than that for a
is consummated. The initial price per unit and the warrant pricing
traditional IPO.
have largely been close to $10 per share but may vary.

Target Search
The search for a suitable acquisition is similar to the process used in a typical M&A transaction, with sponsors
vetting potential targets through an accelerated financial, legal, and tax due diligence process. Although SPACs have
historically been focused on positive EBITDA companies, 2020 has seen a divergence from the norm with pre-
revenue “story-stock” companies entering the fray.

The timeline to close a SPAC acquisition depends on multiple factors. Because dissenting SPAC shareholders have
the right to redeem shares, there can be uncertainty regarding the amount of cash available to pay target
shareholders and for post-close operations. Therefore, SPACs and targets often negotiate a “minimum cash” closing
condition and, for this reason, SPAC acquisitions often include a simultaneous PIPE investment upon consummation
of the merger.

Shareholder Vote
Company bylaws and SEC proxy rules typically require SPAC shareholder approval before the completion of the de-
SPAC process. Therefore, the consummation of a merger typically requires entities to file a proxy with the SEC,
obtain and respond to the SEC’s comments, mail the proxy to the SPAC’s shareholders, and hold a shareholder
meeting. The sponsor and other founder shareholders typically commit at founding to vote their interest (generally
representing 20 percent) in favor of a transaction, which decreases the number of additional common shares
needed to vote in favor of the merger.

Spotlight on Financial Reporting Representative Timeline

Representative Timeline
Although the amount of time between the deal announcement and the deal closing can vary greatly on the
basis of the readiness of the operating company, it can be as short as four to six months, as illustrated in
the timeline below.

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Transaction closes
Transaction File 10-Q (45 days)/
File merger File Super 8-K
announced 10-K (90 days)
proxy
SEC comment period
Diligence/ Registration statement SOX implementation period
and shareholder notice
Negotiation preparation* period
1–2 months 2–4 months 2–4 months 4 days Up to 5 years (depending on EGC status)

*This is an illustrative timeline for a nonaccelerated filer. The actual timeline will depend on specific facts and circumstances.

The financial reporting requirements for a target in a SPAC merger are voluminous and must be completed
in a compressed SPAC merger timeline leading up to the proxy statement or Form S-4 filing. The reporting
requirements include preparation of the following:

 Annual financial statements for the required periods in compliance with public company GAAP and SEC
rules and audited under PCAOB standards. Entities may be required to provide three years of annual
historical financial statements in certain circumstances.
 Interim financial statements for required periods.
 Pro forma financial information.
 MD&A and market risk disclosures.
 Other nonfinancial information for a Form S-4 or proxy statement and a special Form 8-K (“Super 8-K”).
Furthermore, to meet these requirements, an entity should have a deep understanding of complex
accounting and SEC reporting rules and regulations in order to:

 Determine the historical periods for which target company financial statements are needed in the
proxy statement or Form S-4, while giving consideration to staleness dates.
 Apply public company accounting standards and public company adoption dates for new standards, if
required, and reflect their impact on the entity’s financial statements.
 Determine the “acquirer” for financial reporting purposes.
 Determine the impact of historical acquisitions and dispositions, which may involve additional financial
reporting requirements, and consider potential consultation with the SEC.
 Successfully respond to SEC comments.

Acquisition Close
If an affirmative vote is obtained from the proxy process, the target acquisition can close by merging into the SPAC,
and the target company becomes a publicly traded entity. A Super 8-K must be filed within four days of the
acquisition and must contain substantially the same information that would be required in a registration statement
for companies that go through a traditional IPO. Further, the sponsor’s founders’ shares and warrants are locked up
for a specified period (the “lock-up period”) starting from the date of the Super 8-K filing. The lock-up period is
typically one year, subject to negotiation at the inception of the SPAC.

Managing Ongoing Operations

Closing the acquisition is just the beginning of the new, public phase of the operating company. On the date of the
closing, the formerly private operating company must be able to meet public company reporting obligations. At that
stage, it is imperative that the company make a focused effort to elevate people, processes, and technology to
support the demanding reporting schedule of a public company.

An assessment of capabilities should include, at a minimum:

 Budgeting, forecasting, and investor relations — The FP&A and investor relations functions should be a focal
point so that the entity can ensure that accurate and transparent forecasts are communicated to investors and
analysts.

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 Financial reporting — Finance and accounting professionals should have a strong skill set in SEC reporting and be
disciplined in meeting monthly and quarterly close and reporting deadlines.
 Internal controls over financial reporting — Finance and accounting personnel should be well versed in
maintaining effective disclosure processes and controls, including effective internal controls over financial
reporting.
 Tax planning and strategy — Tax planning and strategy is a key element of cash management and budgeting. In
addition, SPAC transactions may be accompanied by an “UP-C” tax structure and a tax receivable agreement to
allow the former target shareholders to receive certain tax benefits.
 Governance — The board of directors and related committees are required to meet the governance
requirements of either the NYSE or Nasdaq, both of which require a majority of independent directors, an
independent audit committee, and an independent compensation committee, and may require an independent
nominating or corporate governance committee.
 Information technology — A well-structured ERP suite is needed to sustain all of the business objectives
discussed above. In addition, the board and CIO should have an enhanced focus on cybersecurity and the
protection of sensitive information.
Other key processes that should be assessed include treasury, executive compensation, internal audit, legal and
compliance, and human resources.

Momentum of SPAC in Asia

No question that special purpose acquisition companies—SPACs—are hitting peak hotness. There is now a
significant uptick in companies in China and across Asia considering a similar route to accessing US capital markets
as investors and management teams try to mitigate some of the challenges of traditional US IPOs; in particular
market volatility around pricing and the significant investment of management time and cost. Some of the city’s
billionaires, such as Richard Li and Adrian Cheng, have raised or are preparing to raise such funds in the US.

Given market developments in US SPAC listings in recent years and potential merger and acquisition opportunities in
the Asia Pacific region, Both Hong Kong Stock Exchange ("HKEX") and Singapore Exchange ("SGX") received
increasing market interests to introduce SPAC in their capital markets. In particular under current economic
environment, this is of the view that the introduction of SPAC may capture the opportunities in Asia and generate
benefits to capital market participants and become a viable alternative to traditional IPOs for fund raising in the
region.

Accordingly, SGX is consulting on a SPACs Framework to introduce a new listing vehicle to the Singapore market.
Hong Kong is racing with rival Singapore to become the first Asian hub to green light such vehicles. The Hong Kong
Government has directed the regulator and the HKEX to come up with a framework that fits its market as the Asian
financial hub seeks to get in on a boom in Asia SPAC deals that has mainly been centered in the US. The members of
the Financial Leaders Forum, chaired by Financial Secretary Paul Chan, learnt from HKEX that a market consultation
will be held in 3Q21. Yet, after years spent squeezing out shell companies that were seen as a hotbed for pump-and-
dump stock manipulation, this is expected that authorities will take a cautious approach.

Ultimately for a long term success for a stock exchange, quality of listed companies, integrity and investor
protection are always the most critical factors.

Considerations for Targets: SPAC versus traditional exit options

Are we ready and willing to operate as a public company?
When SPAC sponsors approach private companies, often out of the blue, the deal can look attractive enough that
Targets find themselves scrambling to meet the strict deadlines in complying with a public company’s immediate
and ongoing requirements. SEC (or upcoming HKEX/SGX) registration and regulatory paperwork are basically the
same for a traditional IPO or SPAC. An IPO, however, generally provides more time—sometimes years—for a
company to ready operations, upgrade financial reporting processes, and mature governance organizations.

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Are we willing to negotiate to improve SPAC merger economics?

Postmerger shareholders typically assume significant dilution due to SPACs’ inherent structure. In many cases,
sponsors provide just 2 percent of the IPO value but receive 20% of the SPAC’s total equity. But nearly every aspect
of SPAC merger transactions is negotiable, and Targets should prepare to negotiate everything from setting the
opening stock price, sponsor ownership stakes, board composition, lock-up periods, and more. As more target
companies actively engage in these negotiations, the quality and economics of deals are steadily improving in favor
of postmerger investors.

Do SPACs portend even higher valuation multiples?

SPACs are required to close transactions within two years or return IPO proceeds to shareholders. As SPACs
approach their two-year anniversaries, the incentive to close deals may pressure some sponsors to overpay for
deals. Combining record US SPAC issuance with close to US$3 trillion in private equity dry powder and
approximately US$2 trillion in excess corporate liquidity, it is easy to envision a scenario in which demand for targets
exceeds supply, creating upward pressure on valuations.

How Deloitte Can Provide Assistance

Deloitte has a team of professionals with experience advising companies throughout the life cycle of the SPAC
process. We can advise and assist with the following:

 Seller assistance, vendor due diligence, or both.

 Implementation of public company GAAP.
 Responding to SEC comment letters.
 Evaluating the significance of business acquisitions and the resulting reporting requirements.
 Assessment and build-up of an internal control environment for public companies.
 Assistance with SOX implementation and certification.
 Designing automated solutions for financial reporting processes and controls.
 Tax planning/UP-C strategy and compliance.
 Information technology system assessment and implementation.
 Corporate governance structuring and reporting.
 End-to-end project management.

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Contact us

Jensen Zhao Kay, Dick M. W.

National Leader National Leader
Deloitte China VCPE Program Deloitte China National Public Offering Group
Tel: +86 10 8520 7412 Tel: +86 21 6141 1838
Email: [email protected] Email: [email protected]

Conrad Chan Kinson Lau

National Leader Southern China Regional Leader, Hong Kong Capital
Deloitte China VCPE Program Market Leader
Tel: +86 10 8512 5710 Deloitte China National Public Offering Group
Email: [email protected] Tel: +852 2852 6680
Email: [email protected]

Philip Law Taylor Lam

Southern China Regional Leader Northern China Regional Leader
Deloitte China VCPE Program Deloitte China National Public Offering Group
Tel: +852 2852 5658 Tel: +86 10 8520 7126
Email: [email protected] Email: [email protected]

Gerry Yuan Alvin Tse

Southern China Regional Leader Eastern China Regional Leader
Deloitte China VCPE Program Deloitte China National Public Offering Group
Tel: +86 20 2831 1022 Tel: +86 21 6141 2470
Email: [email protected] Email: [email protected]

David Fei Jon Peng

Eastern China Regional Leader Western China Regional Leader
Deloitte China VCPE Program Deloitte China National Public Offering Group
Tel: +86 21 6141 1882 Tel: +86 23 8823 1257
Email: [email protected] Email: [email protected]

John Zhu Mark Lian

Eastern China Regional Leader US Capital Market leader
Deloitte China VCPE Program Deloitte China National Public Offering Group
Tel: +86 21 2316 6396 Tel: +86 10 8520 7156
Email: [email protected] Email: [email protected]

Issac You
Western China Regional Leader
Deloitte China VCPE Program
Tel: +86 28 6789 8185
Email: [email protected]

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