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If you have been following commercial news in the past year or two, you will have heard of Special Purpose Acquisition Companies (SPACs). SPACs are a particular type of company that another company can use to fast track its path to being listed on a stock exchange. This term has recently been attracting more attention as the use of SPACs has been drastically increasing in the last few years. 

This article is a beginner’s guide, covering:

  • what a SPAC is; and 
  • its relevance in Australia. 

In doing so, we also touch on the differences between listed and unlisted companies and what is involved in the IPO process in Australia.

Listed vs Unlisted Companies

Listed companies are those on a public stock exchange. This allows the company to raise capital directly from the public and obtain a significant capital injection after the initial public offering. Initial public offering (IPO) refers to how a private company becomes a listed company. As a result, the public can:

  • buy;
  • sell; and 
  • deal with

a listed company’s shares. These companies are therefore also known as public companies. 

However, a public company is subject to various regulations, reporting obligations and legal and ethical duties. 

By contrast, an unlisted company or private company can only have shareholders that are individuals or companies who are separate from the private company. Additionally, they cannot have more than 50 non-employee shareholders. This limits its capital raising ability. Despite this, there are benefits to being an unlisted company. For instance, it:

  • has less regulations than a listed company;
  • has fewer legal obligations to comply with; and 
  • is less susceptible to legal actions.   

If a company wishes to become public, it must engage in the IPO process. 

What is Involved in the IPO Process in Australia?

A private company wanting to be a listed company must meet all requirements imposed by the:

The IPO process is heavily regulated to ensure only the appropriate companies become listed. Otherwise, it risks public safety and hinders the honesty and fairness of the Australian financial market. 

A private company requires a team of experts to advise and guide them through the IPO process to manage it effectively and ultimately ensure its success. This includes:

  • lawyers;
  • investment banks;
  • accountants; 
  • independent financial advisers; 
  • public relations and marketing consultants; and
  • specialist experts, amongst others.

Investment bankers are especially critical as they are experts at managing the IPO process and deciding the price. Additionally, lawyers will guide you through the legal process of listing and the regulations in connection with the IPO process. 

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What is a SPAC? 

A SPAC is a company specifically formed to assist private companies in expediting the IPO process and becoming a public company. It is a listed shell company with no commercial operation. Instead, it operates as an investment vehicle that solely exists to acquire or merge with a private company. That private company then completes the process by being part of the SPAC. 

What is De-SPACing?

The acquiring or merging with a private company is often called de-SPACing, as afterwards, the entity is no longer a SPAC.

However, there are strict timeframes determining when a SPAC must de-SPAC, which can vary depending on the jurisdiction. For instance, this is usually around two years in the US with a possibility for an extension. 

A SPAC that does not find a company to acquire or merge will need to liquidate and return the capital to the investors. 

One significant advantage of using a SPAC to go public is that, from a regulatory perspective, it is less complicated and time-consuming. Additionally, it can often be cheaper.

Investing in a SPAC

The initial investors invest in the SPAC at the time of its formation and complete the second round of capital raising before the acquisition or merger to meet any shortfalls. In the US, the second round of capital raising is known as a private investment in public equity deal (PIPE). The initial investors in the SPAC will also usually recover their first investment from the second round of capital raising. Investors typically form SPACs to pursue a target in a particular area they have experitse in. Investors will deposit all their investment amounts in the SPAC into a bank account.

Notably, there are prohibitions on using those amounts for any purpose other than acquiring or merging with a company.

Relevance to Australia 

SPACs are primarily an American concept but have been gaining a lot of traction in Europe. However, the structure of SPACs does not neatly fit with the Australian law governing IPO. This is because Australian law prohibits listing companies with most of their assets (more than 50%) as cash. This prohibition is unlikely to change anytime soon. Therefore, private companies in Australia cannot expedite their listing by merging or acquiring a SPAC.

Nevertheless, SPACs are still relevant to Australia because Australian companies can be the target of SPACs. This would mean those Australian entities will have a listing in a foreign stock exchange. 

Key Takeaways

SPACs are a particular type of company that private companies use to expedite the IPO process and become public. Although it has been gaining a lot of traction internationally, private companies in Australia cannot use SPACs to become public due to legal restrictions. However, SPACs are still relevant to Australia because Australian companies can be the target of SPAC acquisition or mergers.

If you need help with the IPO process or would like to know more about SPACs, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What are SPACs?

SPACs (Special Purpose Acquisition Companies) are a special type of company that another company can use to fast track the IPO process and become listed on a stock exchange. It is a listed shell company with no commercial operation. 

What is the IPO process?

The IPO (initial public offering) process by which a private company becomes a listed company. It is a highly regulated process which involves meeting legal, ASX and ASIC requirements to ensure only the appropriate companies become listed. 

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