FSC Weekly e-Briefing (2010.3.2)

Progress Report on SPAC

Ernst Lee:

Hello. Welcome back to Financial Services Commission’s weekly e-Briefing. My name is Ernst Lee. Today let me start with my personal story. For me, I was in the market and I’ve been working here at Financial Services Commission over 1 year. Since this is Financial Services Commission, sometimes my friends are calling me and they just ask me a special service, they just ask me what stocks to buy. Of course, we don’t provide such kind of services and I don’t know what stocks to buy actually. But I could understand that investment is a prime importance or interest for common people like you and me.

And today, I like to introduce the investment vehicle that financial services commission has recently launched. Before we start, let me give you a quiz. By year-2008 in the U.S., 28% of IPO transactions were done by this, in terms of the IPO amount, 13%. So what is this? If you give me a right answer, please contact me and I will buy your lunch. The answer is SPAC, which stands for Special Purpose Acquisition Company. In the wake of global financial crisis, two things have become prime importance, reducing system risks and enhancing investor protection. We, financial services Commission, have launched the investment vehicle leading these two targets. A SPAC, Special Purpose Acquisition Company, is today’s topic.

Before I go into the much detail, let me brief you about key charms of SPAC. 1) Unlike Private Equity Fund or hedge fund, SPAC has minimum leverage, which means less system risks. 2) Enhance the investor protection. On this side, 90% of IPO amount is being secured at external trust accounts, so it’s quite safe. And 3) We expect, this will invigorate sound development of capital market, which will lead to virtuous cycle of capital. 4. For ordinary people like you and me, this is not an easy thing to join M&A transactions, of course, there is Private Equity Fund (PEF).

But according to Korea regulation, PEF requires, for individual, minimum KRW 1 billion and, for institutional investors, KRW 2 billion. We don’t have such a big money. But for SPAC, you can even go down to below KRW 10,000 for minimum investment for one share. So it’s very easy access. We have broadened the spectrum of investment and make it easy for ordinary people to invest in major M&A transactions.

Without further due, let me invite my good colleague, Mr. Cho, In-Kang, the Director General of Capital Markets Bureau of Financial Services Commission, will elaborate the details of SPAC and the current stage of development of SPAC and, of course, policy drives for FSC, ‘How will develop the SPAC?’ Please welcome, Mr. Cho, In-Kang, my good colleague. Thank you.

Cho, In-Kang:

Good afternoon. I am Cho In-Kang, the Director General of FSC’s Capital Markets Bureau. It is my pleasure to have this opportunity to talk about SPACs. As Mr. Ernst Lee gave you a brief introduction on the basic concept of a SPAC, I would like to elaborate on recent market developments of SPACs. As of now, seven SPACs got legal entities, and four of them already submitted their applications for public offering and began raising funds. Last Tuesday, Korea’s first SPAC completed its public offering. Reflecting an extraordinary interest from the market, SPAC raked 87 times more money over original offering size. With this decent start, we expect more SPACs to go public, creating a robust market for SPACs.

To begin with, I would like to touch the issue why Korean government adopted SPACs system. As you may know, the recent global financial crisis increased uncertainty in Korea’s financial market and dampened business activities including IPOs and M&As. We expect SPACs to absorb abundant short-term capital and help companies with high growth potential to finance in an efficient and swift manner. Also, for investors, SPACs can provide a low-risk-and-long-term investment opportunity in M&As.

Secondly, let me outline briefly about Korea's SPAC system.
Considering relatively low level of participation by individual investors in Korea’s M&As market, we have specifically designed the SPACs so that they mandate transparent M&A process, disclose their management style and enhance investor protection mechanism to make way for a stable participation from the individual investors.

To give you a more detailed step-by-step process,
① First of all, in its establishment stage, one of the initial sponsors must be a financial investment company and they are regulated to invest 5% or more in SPACs in order to avoid agency problem.
② Secondly, in its IPO stage, higher than 90% of its collected funds from general investors must be deposited separately and be strongly protected like stock depository money.
③ Lastly, in its listing or merging stage, the change of existing managing staff who is in charge of selecting M&A target companies and heading the negotiation process is strictly forbidden. Moreover, the managing staffs are not to have immediate interests with sponsoring companies.

The SPAC must merge with a company with assets exceeding 80% of the SPAC's value within 36 months time. If a deal has not been reached within that period of time, the funds must be returned back to the initial investors. Although they are still in the early stage, it is good news that SPACs are gaining market attention. However, there is also a concern that the excessive interest in SPACs might overheat and disrupt the market.

The FSC, therefore, will work with the Financial Supervisory Service and the Korea Exchange to monitor the whole cycle of a SPAC from an IPO to an acquisition. If necessary, the FSC will take proactive measures to upgrade the system and strengthen market regulations so that we can maximize SPACs’ positive impact on the market. In this regard, I would like to request investors and financial companies to join our efforts and implement sound practices in this new market. Thank you!