Sep. 30, 2021
30 September 2021
Dear Ms. Countryman,
I am writing to support New York Stock Exchange’s Notice of Filing of Proposed Rule Change Proposing to Adopt Listing Standards for Subscription Warrants Issued by a Company Organized Solely for the Purpose of Identifying an Acquisition Target (SR-NYSE-2021-45). The current structure of special purpose acquisition companies (SPAC) needs some serious modification, which I believe the proposed rule change will be the most practical solution.
SPAC has been the closest thing for the general market to gain access liberally to private markets as an asset class, which normally is only available to institutional investors, endowment funds or high net worth individuals. However, there have been some setbacks regarding the current SPAC structure which I believe the proposed rule change will be able to fix.
Firstly, it is the uncertainty that investors must deal with under the current structure. To participate, investors commit their capital and wait for their sponsor to find a target. This means investors do not know their risk exposure but have committed their capital just to gain access to private companies and their sponsor deal makings. This can change with the rule change proposal, whereby the sponsor must bring the deal to the table first, investors can then decide whether to participate via their rights in their subscription warrants, enabling appropriate level of risk management. This will make it more efficient and transparent for all counterparties involved, protect investors from committing to the unknowns and reduce speculative activities pre deal announcements.
As you might have seen, SPAC redemptions have also been high relative to the ultimate cash held in trust after redemption rights. Some SPACs saw up to 90-95% of cash in trusts redeemed, whilst their underwriting fees remained fixed with the amount of capital raised in the initial SPAC IPO, resulting in fees in excess of 100% of capital available for initial business combination with a target private company. This is highly inefficient and capital destructive. Subscription warrants under the proposed rule change would eliminate this issue since underwriting/ advisory fees (if any) shall materialise later upon final capital formation after all warrant holders exercise their rights to commit capital.
Moreover, the sponsor promotes for SPACs have been highly troublesome. Because a typical SPAC structure gives 20% of SPAC shares to the sponsor at a nominal value of just $20,000, the incentive is therefore conflicted with all shareholders because the sponsor will be worth off regardless of deal quality or the share price thereafter. To address this matter, any promotes under the new proposed structure should also take this factor into consideration. I believe it should be tied to deal quality, earn-out type of compensation such as long-dated out of the money options paid adequately by the sponsor at fair value. This means the sponsor must create substantial shareholder value first before their promote dilutions upon general investors, better aligning interests.
It is also the opportunity to close any regulation loophole whereby financial projections are permitted in SPAC mergers. Unrealistic financial projections have been made, evident in pre-revenue companies going public at questionable valuations. Some companies have not even made a product. I believe the proposed rule change is the opportunity to address this issue and to better protect investors.
Lastly, I would like to comment that there should be regular updates just like normal public companies, perhaps semi-annually or quarterly from the sponsor to their prospective investors regardless. Lack of communication can be difficult for shareholders to manage their risks and expectations. Although under the proposed rule whereby much less capital is tied to the proposed structure, it is still in the interest for the subscription warrants holders to know what their sponsors have been doing for their rights.
I hope the SEC will approve this proposed rule change by the NYSE. I believe it will foster competition to the traditional IPO market and provide an efficient alternative route to raise equity capital in the public market, allowing all counterparties to have more choices, promote growth and innovation.
Sincerely,
Sahawat Charoensintaweekoon