Our friends over at the Zimbabwe Stock Exchange once again caused a bit of a stir as they announced the draft lifting rules for Special Purpose Acquisition Companies (SPACs). Credit to Justin Bgoni and his team, they are working hard and bringing many things to fruition. The Victoria Falls Stock Exchange, ZSE Direct, the maiden ETF and now this new creature on the horizon has a lot of people wondering what it means. First, we will look at the concept of a SPAC, discuss highlights of the draft and shed some light on pertinent issues.
The SPAC is not a new creature, they are a well-established company type in the world of finance both private and public. It is a company as the name suggests that is set up for the specific purpose of acquisition. A company that has no commercial operations so runs no business of its own but is established to purchase an asset or business. Imagine a scenario where some very smart people identify a private company or perhaps a subsidiary of another company that has the potential to do well and list separately. These people can form a SPAC to acquire that business (asset) and proceed to separately list it. This draft document discusses the plans and rules around having SPACs listed with the ZSE. That means from the onset the SPAC is listed on the ZSE. You will see later why this is an advantage.
Why are people excited about this development you ask? Well, the ZSE has a very poor track record with new listings. By no fault of their own of course. Economic conditions have made listing very few and far between. Those same conditions have precipitated in many delistings and the ZSE is down from 78 companies to 49 companies and 1 ETF. To put in perspective over the last 10 years we have seen 6 new listings (one of which was an IPO), 25 delistings and a few suspensions. Something needs to be done. One of the issues cited is how hard it is to list on the ZSE. SPACs are a way of shortcutting the listing process. This allows the company to list as a SPAC with less regulation and then bring the business or asset onto the ZSE through acquisition.
After reading the draft regulation I picked up some highlights which will give you the best idea of what SPACs are going to be all about in Zimbabwe.
2.4 Only qualified investors shall invest in SPACs
Qualified investors are institutional investors and High net worth individuals. This makes it exclusive but with good reason as these ventures are considered quite risky.
4.1 Must not carry on any business before listing
We discussed this before. The company should not have business operations but should be set up for acquisition.
4.5 Directors must hold at least 5% and hold for 6 months after purchase of assets. Held in trust or custodial account.
The directors of the SPAC must hold at least 5% of the shares or units of the SPAC. The shares or units will be held in trust or by a custodian. Directors must hold their investment for at least 6 months after the acquisition. This ensures that directors have a vested and ongoing interest in the company even after the acquisition.
4.7 ZWL$10 million capital
The SPAC must raise a minimum of ZWL$10 million in capital. This is greatly relaxed from the ZSE ‘s US$10 million capital requirement though it can be negotiated.
6.1 24 months to complete the acquisition
SPAC is given 24 months from the initial listing to complete its acquisition. They may be allowed to extend this but should they fail to convince the ZSE that the acquisition is in the process they are required to liquidate and reimburse investors.
7.4 SPACs can raise additional capital in the market through rights issues or security holder approval
SPACs are allowed to raise additional capital in the market but only through rights issues or additional share issues which must be approved by a 75% majority vote of security holders. This means SPACs can list with the initial amount required and then raise more.
10.1 75% vote for the acquisition
The acquisition transaction must be agreed to by a 75% vote of security holders. This keeps power in the SPAC firmly in the hands of investors and preventing directors from acting out of self-interest.
10.4 No debt
SPACs are not allowed to carry any debt except debt arising from accounts payable in the course of running the SPAC, unsecured loans not exceeding 10% of equity and debt acquired with assets (businesses). This prevents leveraged buyouts in which debt is used to acquire businesses and sometimes the business itself is used as the security for the debt. The idea is to bring capital into the market rather than use debt.
16.1 After acquisition SPAC must meet listing rules or delist
After the acquisition is complete the SPAC must meet normal ZSE listing rules. That means the listing is converted from a SPAC listing to a full ZSE listing. The purpose of the SPAC will be complete and the company converts to a regular listed entity. Hence the idea that SPACs should bring more listings to the ZSE.
The draft document spells out the idea here very clearly. The intention is to bring more listings to the ZSE by easing the path. This makes good sense because of the 6 listings in the last 10 years 5 (Cassava, Proplastics, Axia, Simbisa and Padenga) were unbundlings from larger companies. So leaning into what has worked makes sense. Slightly disappointing that smaller investors will not be able to get in on the ground floor with the restriction to high net worth individuals. We are still at the draft stage and clarity will be provided as the idea progresses.