Egypt Allows SPAC Listing
With the accelerated rise of special purpose acquisition companies (SPACs) over the past years, the Financial Regulatory Authority (FRA) in Egypt has given its green light for the establishment and licensing of SPACs.
A SPAC is a company that is established solely to raise cash fund, through an initial public offering (IPO), for the purpose of acquiring or merging with an operating business (the target company) within specific time (a De-SPAC transaction). Prior to acquiring the target company, a SPAC will act as a shell company with no underlying operating business nor assets other than the proceeds from the IPO.
According to the FRA’s announcement, the founders will incorporate the SPAC as venture capital company under the rules of the Capital Market Law No. 95/1992. This to be followed by an offering for capital increase shares by public subscription and/or private placement. The proceeds of the subscription will then be used to acquire or merge with one or more companies.
The proceeds of the subscription will be kept in an interest-bearing trust account until the acquisition or merger of the target company is completed (combination). If the planned combination has not completed within a maximum of two years, the SPAC will be liquidated and required to return the funds to the investors, after deducting the prescribed commissions and other expenses.
FRA has announced that it will issue later the rules for listing and writing off securities related to these companies. Earlier this year, the Egyptian Exchange (EGX) has suggested amendments to its listing rules to allow listed companies to acquire unlisted companies provided that the latter be in full compliance with the governance rules and achieve a positive average compound annual growth rate (CAGR) of revenues.
SPAC Life Cycle
A SPAC’s life cycle typically begins with its incorporation, followed by its IPO, the search for the target company(ies), a shareholder merger vote, and, finally, the close of an acquisition or the merge with the target (or the liquidation of the SPAC and the return of the proceeds to investors).
A SPACs is formed by a sponsor and founding investors with fund and industry knowledge to lead the SPAC process. During this stage, the SPAC will select its legal counsel and underwriters and establishes its governing documents in preparation for the IPO.
The SPAC will start the process of its IPO to raise the required capital and complete the acquisition of the target company. The capital can be obtained from retail and institutional investors, and the cash collected will be held in a trust account. The prospectus of the IPO is expected to explain the plans of the SPAC to focus its search for a target on a particular industry or geographical area. In many jurisdictions, the SPAC will issue unites to the investors, with each unit consisting of a share of common stock and a warrant to purchase more stock at a later date.
Seeking a Target
once the fund is completed through the IPO, the SPAC will start identifying the target. A financial, legal, and tax due diligence process similar to that used in traditional M&A transaction will be followed. The prospectus should specify the duration for the SPAC to complete an acquisition.
The bylaws of the SPAC will require shareholders approval before the completion of the combination. There are here three expected potentials here; either the shareholders (i) vote in favor of the acquisition of or the merge with the target and in this case a combination agreement will be signed, (ii) vote for the extension of deadline to find a suitable target or finalize the combination negotiation, or (iii) vote against the target and for the winding up of the SPAC. In this case, funds will be refunded to the shareholders.
Once the transaction is approved by the affirmative vote of the shareholders, the target acquisition can close by merging into the SPAC, and the target company becomes a publicly traded entity.
SPACs has quickly emerged in different jurisdictions as an alternative to traditional IPO for a private company to go public. For sponsors, SPAC transactions is a vehicle to raise capital outside of traditional buyout funds and access to targets that are seeking to go public. For investors, a SPAC is an opportunity to invest in a company led by experienced investment professionals who are incentivized to make an attractive acquisition. For a target company to go public by a sale to a SPAC is generally faster and cost effective than traditional IPO, and there is an opportunity to early negotiate the price with the SPAC which results in less market uncertainty.
How Can Riad & Riad Help?
Riad & Riad capital market team is well-positioned to deliver full-service advice and representation to SPACs, their sponsors, underwriters, and M&A participants. Our team can guide SPACs throughout their life cycle, from incorporation, to IPO, the subsequent merger or acquisition, and then as a public company. For more information, you can contact Fatma Salah and Mohamed Riad