By Kuo-Ming Huang and Meng-Chin Tsai, Senior Partner and Associate Partner of Formosan Brothers, Attorneys-at-Law

Since 2020, “SPAC” has been a heated topic in the capital market and usually accompanied news that touted how some publicly-listed companies were valued off the chart up to hundreds of million dollars. Lately, Gogoro also chose to enter the U.S. market via a SPAC among a myriad of capital markets. So, what on earth is a SPAC? What are its advantages and disadvantages? What are things to watch out for regarding SPACs?

Conceptually, a SPAC is a publicly-listed company whose purpose is “to acquire a private company and make such private company listed on the market.” Such a publicly-traded company conducts no other businesses beside completing the acquisition within a certain period of time. After a SPAC acquires its target companies, the target companies will have the qualification to be listed on the market, and original shareholders of the SPAC will obtain shares of the target companies in return.

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Someone once commented that, “SPACs are private-equity funds for poor people.” In fact, quite a few SPACs are created by private-equity funds. There are four things in common between a SPAC and a private-equity fund: 1. the purpose of acquiring non-specific companies which already exist; 2. a limited duration; 3. increase of the target company’s financial leverage; 4. guidance from professional managers.

Although there are similarities between SPACs and private-equity funds, the key difference is: SPAC stocks may be bought and sold freely without restrictions on the qualification of the investor. That is, the beneficiary certificates of a SPAC are stocks that are publicly issued on the market and can be freely traded and circulated without restricting its investors to high-income people. On the contrary, U.S. private-equity funds are limited to specific high-income investors, and there is no public market to freely trade or transfer their beneficiary certificates. Because of this characteristic of SPAC, the U.S. Congress and the Chair of the U.S. Securities and Exchange Commission lately expressed concerns regarding whether SPACs can sufficiently protect the rights of common investors.

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Why do companies use SPACs to get listed in the stock market?

Compared to traditional IPOs, it is more flexible to use a SPAC to get listed in the stock market. That is, when a SPAC uses a publicly-listed SPAC to acquire and merge with a private target company, the target company has considerable flexibility to evaluate and explain its business growth prospect and financial forecast, making it easier to obtain higher company valuation. On the contrary, companies listed through traditional IPOs need to follow strict disclosure obligations. SEC even issued Regulations S-K Section 10(b) as the guideline for how companies shall make their financial forecasts. Although SPACs enjoy some regulatory flexibilities, SEC still issued reminders several times regarding SPACs’ obligation to truthful disclosure. If there is any misrepresentation, the SPAC and its responsible person might still be liable for violating securities exchange laws.

Because of a SPAC’s flexibility in making forecasts on business growth and future financial prospects, since 2020, reports have repeatedly pointed out that SPACs were involved in misrepresentation of business or finance, making investors suffer losses. For example, in 2020, the founder of Nikola Corporation, which was listed through a SPAC, announced unfinished products of the company through video clips and press releases, but, after the SPAC transactions were completed and Nikola was publicly traded on the market, reports surfaced that the company was involved in misrepresentation. In July 2021, SEC filed a securities fraud lawsuit against the founder of Nikola, Trevor R. Milton.

From the example above, we see that although SPACs can give businesses certain flexibilities in disclosure, but since negative reports about SPACs are increasing, which in turn makes investors more apprehensive, SPACs may not be the best way for businesses to raise funds. Lately there have been news reports stating that after a SPAC announced its public listing, there were more than 50% of investors who requested to redeem their investments, which greatly decreased the amount of fund raised by a SPAC listing. For example, this year, when the SPAC company Locust Walk Acquisition Corp. proposed the acquisition of eFFECTOR Therapeutics Inc. for the shareholders’ approval, the rate of redemption by the shareholders was as high as 97%, which significantly decreased the amount of fund eFFECTOR Therapeutics Inc. could raise by listing through a SPAC.

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Preparation for a SPAC listing for Taiwanese businesses

Despite the controversies surrounding SPACs, they are still a possibility for public listing for Taiwanese businesses. However, before considering taking this route, one needs to understand the differences between the U.S. and Taiwan. In terms of accounting systems, the U.S. adopts the U.S. GAAP and one needs to reference the FASB (Financial Accounting Standard Board) guidelines to prepare and disclose their financial reports. Taiwan currently adopts the IFRS. As such, in terms of accounting systems, Taiwanese businesses need to make some adjustments first. In addition, when conducting M&A activities in Taiwan, companies are often evaluated by their stock price, net value per share, and EPS, but in U.S., a company’s EBITDA multiple, price-to-book ratio, and price-to-sales ratio are more often used. Therefore, there might be differences in terms of the basis of discussion. One needs to be mentally prepared for such a difference before negotiation.

Lastly, if a Taiwanese company desires to be listed abroad, the company may need to adjust its organization first to ensure that it complies with the Taiwanese government’s regulations regarding foreign investments.

In conclusion, if a Taiwanese company plans to be listed via a SPAC, there are considerable amount of preparation in the preliminary stage. The company needs to work closely with its accounting and legal teams to adjust its organization and preparations to ensure a smooth SPAC listing process.
(This article was published in the Expert’s Commentary Column of the Commercial Times：https://view.ctee.com.tw/legal/33243.html）

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