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Thursday, February 15, 2024

SECP introduces new framework for SPACs

Securities and Exchange Commission of Pakistan has allowed the use of Special Purpose Acquisition Companies for raising funds in Pakistan. SPACs, also known as shell corporations or blank cheque companies, are used for the purpose of acquisitions or mergers with private companies and then taking them public.

In a bid to boost the financial sector in Pakistan, the Securities and Exchange Commission of Pakistan (SECP) has allowed the use of Special Purpose Acquisition Companies (SPACs) for capital formation in Pakistan.

Announcing the use of SPACs, the press release read, “The Securities and Exchange Commission of Pakistan (SECP) has amended the Public Offering Regulations, 2017 to introduce a regulatory framework for Special Purpose Acquisition Companies (SPAC).”

“The introduction of SPAC in Pakistan’s market is expected to boost up activities in the primary market, encourage new listings and help companies to tap capital for large scale merger/acquisition transactions,” PR added.

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This news indicates a major change in the way businesses are conducted in Pakistan. SPACs are shell companies – listed and traded on the stock exchange – that are created for the purpose of acquisitions/mergers with a target private company and then taking that company public.

SPACs – also known as blank cheque companies – do not own any operational assets, and therefore, have no commercial operations. The aforesaid fact is precisely what attracts businesses and investors to establish SPACs, as having no operations shortens the process for the SPAC going public.

Whereas a normal IPO may take up to three years to materialize, an IPO for a SPAC is completed in maximum two to three months.

SPACs, in Pakistan, have been allowed a maximum life of three years – thirty-six months – to complete the process of acquiring or merging with a target private company. When investors decide to invest in a SPAC, they do not bet on the company’s future for returns, but on the sponsors vision and reputation as the target company may not have been selected at the time the SPAC goes public.

In the United States of America, when the SPAC is in the process of going public, it sells units, not shares and these units include shares, warrants and occasionally certain outlined rights. These units sell at $10 each. In Pakistan, on the contrary, SPACs will be allowed to raise financial capital through equity and/or warrants.

What makes investing in SPACs lucrative is the security of investment provided to the investors. Globally, the funds raised through a SPAC IPO is kept in a blind trust and cannot be tinkered with unless and until the sponsor finds a target company for acquisition or merger.

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In that case too, the sponsor is legally obligated to have the investors vote for the proposed move. In case of sponsor’s failure to get investors approval or any investor’s consent for the proposed deal, the sponsor is legally bound to return the investor(s) money.

In Pakistan, the sponsor has been instructed to keep money in an escrow account. An escrow account is an account under the supervision of a third/mediating party to overlook the security of that money until the deal gets through. Furthermore, the security of investment in SPACs has been set at the prevailing global standards.

The finances raised through the SPAC IPO usually covers only 25 to 35% of the acquisition cost, whereas the rest of the money is generated via a private investment in public equity (PIPE) investment. In PIPE investment, institutional investors are invited to buy stocks at below market value, directly from the SPAC. Moreover, the notification issued by the SECP also instructs the SPAC to raise at least 20 million rupees for the merger/acquisition and the sponsor to hold at least 15% of shareholding in the merged corporate entity for a time span of one year from the time of the merger.

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SPAC was first formed by David Nussbaum in the US in 1993 when shell corporations were not allowed in the US but the evolving financial world forced not only the US but also other countries across the globe to allow the use of SPACs, with certain regulations. The use of SPACs will prove to be beneficial for ramping up financial activity, as this measure increases the ease of doing business in Pakistan.