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GCA Valuation Services for SPACs

By April 11, 2022April 29th, 2022No Comments
GCA Professional Services Group
Published Date: March 2022

Past And Present About SPAC

The term “SPAC” (special purpose acquisition company) was coined in the 1990s, it is a type of blank check company. A SPAC is created specifically to pool funds to finance a merger or acquisition opportunity within a set timeframe.

SPACs 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 (88 billion USD) have already become more than those raised in 2020 (76 billion USD).

SPAC Defined

“SPAC” stands for special purpose acquisition company, it has become a popular vehicle for various transactions, including transitioning a company from a private company to a publicly traded company. Certain market participants believe that, through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional initial public offerings, or IPOs.

SPAC Process

Generally, a SPAC’s life begins with its initial formation, followed by its IPO, seeking for a target, the close of an acquisition (also known as “de-SAPC”) and the post-merger (or the return of the SPAC’s proceeds to investors).
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Before IPO, SPAC management teams typically target an industry or sector, but not a particular company, and then market it to the investors.
Once a SPAC goes public it has a set timeframe. The raised proceeds will be placed into a trust account, and the SPAC usually has 18 to 24 months to use its funds to identify and acquire a target (referred as de-SPAC), or else return the funds to its investors.
A successful acquisition validates the SPAC’s existence and allows the private company to be publicly traded under the SPAC’s symbol.

SPAC IPOs On the Rise

2021 saw a significant increase in the popularity of SPACs as a way to bring private companies public. The growth in popularity of SPACs has been evident for several years, with new highs in each of the past three years. The growth of 2021 is truly impressive, SPACs had raised capital in 613 IPOs in 2021, totaling over $163 billion USD in gross proceed – an 95% YoY growth from the amount raised in 2020. With just under 200 de-SPAC transactions completed in 2021 and another 267 announced, the SPAC market is primed to continue its upward trajectory in 2022.


*2022 as of: Mar 08, 2022

Hong Kong the Late Comer

On 17 December 2021, the Hong Kong Stock Exchange (HKEX) finally announced new rules to create a listing regime for special purpose acquisition companies (SPACs) that have taken effect on 1 January 2022. This follows the publications of new rules on SPACs listings in other jurisdictions, including Singapore and the UK.

The HKEX intends to ensure that the SPAC listings have experienced and reputable SPAC promoters that seek good quality de-SPAC targets. Thus, the HKEX’s SPACs listing regime is more stringent than that of the U.S. and some other jurisdictions. The table below sets out a comparison of Hong Kong’s SPACs listing regime against the current regimes of the U.S., Singapore, and UK:

Source: Allen & Overy LLP, Dec 2021

SPAC Warrants

A SPAC IPO is often structured to offer investors a unit of securities consisting of (1) shares of common stock and (2) a fractional warrant, this is called a SPAC unit. The SPAC unit will trade for some time after the IPO. Sometime after the IPO, the SPAC common stock and warrants may begin trading on an exchange separately with their own unique trading symbols.

Generally, a SPAC issues two common types of warrants, namely public warrants and private warrants. In the IPO, SPACs are typically priced at a nominal $10 per unit, and the 1) public warrants usually carry a “strike price” of $11.50 or higher. The strike price is the price at which the holder can purchase a share of common stock in the SPAC. In contrast, 2) “private warrants” are typically offered to the SPAC sponsors or founders prior to the SPAC going public. Private warrants can have a purchase price or even a strike price significantly below the original issue price of the SPAC shares.

Valuation Considerations for SPACs

The accounting for complex financial instruments is challenging, especially with respect to certain agreements commonly found in SPACs. The SEC’s April 12, 2021 Statement addresses whether SPAC warrants should be reported as a liability or equity. In October 2021, the European Securities and Markets Authority also submitted questions regarding whether the SPAC Shares should be classified as equity or liability.

Warrants generally include features that violate the “fixed-for-fixed” criterion in HKAS 32 resulting in their being classified as financial liabilities. However, in some scenarios, the Warrants will be classified as equity. The fair value measurement of the various instruments and/or components therein may be complex, and the involvement of valuation experts is encouraged.

Accounting Consideration

  • Similar to Promoter Shares, It Is necessary to consider whether Promoter Warrants issued to promoters are within the scope of HKFRS 2 or HKAS 32. See related discussions above.

  • Warrants generally include features that violate the “fixed-for-fixed” criterion in HKAS 32 resulting in their being classified as financial liabilities. Such features include:
    • variability in either the number of shares to be delivered or cash to be received (including a fixed amount of cash in a foreign currency), apart from adjustments that are purely anti-dilutive;
    • the underlying shares are classified at least in part as liabilities during the period when the Warrants may be exercised;
    • the underlying shares are presented as equity due solely to the application of HKAS 32.16A to 16D;
    • settlement options that do not all result in equity classification; and
    • net cash/ shares settlement features.
  • The Warrants will be classified as equity if (i) the underlying SPAC Shares will be classified as equity and (ii) they can only be settled gross by the delivery of a fixed number of shares in exchange for a fixed amount of cash in the SPAC’s functional currency.

Source: Hong Kong Institution of CPA: Accounting considerations for a Special Purpose Acquisition Company (SPAC), January 2022

What we offer

1. SPAC Support

GCA professional Services Group can assist with IPO readiness and SPAC warrant valuation, as well as provide advisory services. With our collective experience and expertise across corporate services and capital markets, we are perfectly positioned to support a SPAC through the whole life cycle.

2. Target company support

GCA professional Services Group can assist with IPO readiness and SPAC warrant valuation, as well as provide advisory services. With our collective experience and expertise across corporate services and capital markets, we are perfectly positioned to support a SPAC through the whole life cycle.

GCA Knows SPACs

GCA Professional Services Group is a leading financial services provider headquartered in Hong Kong. As the leading advisory firms in the region, GCA has 25 years of experience advising on IPOs, mergers and acquisitions, restructuring, financial reporting, amongst others.

Our Profile:

  • 25 years of industry experience in the financial sector
  • Headquartered in Hong Kong and 6 regional offices worldwide
  • Completed over 1,000 transactions, serving both listed and private companies, across the globe
  • Member of the International Valuation Standards Council (IVSC)
  • Regulated firm of The Royal Institution of Chartered Surveyors (RICS)
  • The recognized Valuation Institute by the State-owned Assets Supervision and Administration Commission (SASAC)

GCA Professional Services Group
Address:

Room 304, 3/F, Shui On Centre, 6-8 Harbour Rd, Wan Chai, Hong Kong

For Enquiry:

Telephone: +852 2511 6868
Email: info@gca-group.com
Website: www.gca-group.com


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