Client Alert

Nasdaq Joins NYSE and AMEX in Allowing Listing of Special Purpose Acquisition Companies (SPACs)

August 20, 2008

On July 25, 2008, the SEC approved Nasdaq's proposed rule changes allowing for the listing of special purpose acquisition companies ("SPACs"). This follows the SEC's earlier approval on May 6, 2008 of the NYSE's comparable rules allowing for the listing of SPACs. Previously, Nasdaq and the NYSE would not list SPACs because they lacked an operating history.

SPACs are investment vehicles newly formed and organized to acquire, through a business combination, one or more operating companies. Also known as "blank check" companies, SPACs are publicly traded shell companies that raise funds through initial public offerings (IPOs). The IPO proceeds are placed in a trust pending a qualified business acquisition. Management of the SPAC invests its own money in the SPAC, which is generally forfeited if a business combination is not consummated in the specified timeframe. If a business combination is consummated, management typically acquires up to 20% of the resulting company. The securities sold in the IPO generally consist of a unit made up of one share of common stock and a warrant to purchase common stock (or a fraction of a warrant). A SPAC seeks a business combination with an unidentified operating company, usually in the area of the management’s expertise. If the SPAC's shareholders do not approve an acquisition within a specified period (usually 24-36 months), the SPAC liquidates, unwinds and returns the investors’ investment in the SPAC held in the trust fund.

Nasdaq Listing Standards for SPACs

On March 14, 2008, Nasdaq filed with the SEC proposed rule changes that would allow for the listing of SPACs. The proposed rule changes, as modified by Amendment No. 1 filed on July 10, 2008, were approved by the SEC on July 25, 2008.

Under the new rules, SPACs seeking to list on Nasdaq are required to meet Nasdaq's current initial listing standards as provided by Nasdaq Stock Market Rule 4300. Furthermore, the new rules impose the following additional conditions on SPACs:

• the SPAC must deposit at least 90% of the IPO proceeds and the proceeds of any concurrent sale of equity (usually to management) in a deposit account to be held in trust;
• the SPAC must complete, no later than 36 months after the effective date of the IPO registration statement, one or more business combinations that have a fair market value equal to at least 80% of the deposit account at the time of the initial business combination (a "Qualified Business Combination");
• until the SPAC has completed a Qualified Business Combination, each business combination must be approved by a majority of the SPAC’s independent directors and a majority of the shares of the common stock;
• until the SPAC has completed a Qualified Business Combination, public shareholders who vote against a business combination have the right to convert their shares to cash if the business combination is approved and consummated;
• until the SPAC has completed a Qualified Business Combination, it must notify Nasdaq of each proposed business combination; and
• following each business combination, the combined entity must meet Nasdaq’s initial listing standards to remain listed.

NYSE Listing Standards for SPACs

On May 6, 2008, the SEC approved the NYSE's proposed rule changes providing for the listing of SPACs. To be listed on the NYSE, SPACs must meet the same distribution criteria as other IPOs (i.e., 400 round lot holders and 1.1 million publicly held shares) and meet all of the NYSE's corporate governance requirements applicable to operating companies. The NYSE rules also impose the following additional requirements on SPACs seeking to list:

• the SPAC must demonstrate an aggregate market value of $250 million and a market value of publicly held shares of $200 million, as well as meet the $4 minimum IPO price per share requirement;
• the SPAC must keep at least 90% of the IPO proceeds and the proceeds of any concurrent sale of equity in a trust account;
• the SPAC's business combination must be with one or more operating businesses or assets with a fair market value equal to at least 80% of the net assets in the trust account;
• the business combination must be approved by a majority of the votes cast by public shareholders (excluding officers, directors and 10% or more holders) at a shareholders meeting;
• each public shareholder voting against the business combination must have a right to convert its shares of common stock into a pro rata share of the aggregate amount then on deposit in the trust account (the SPAC may establish a limit (no lower than 10% of shares sold in the IPO) as to the maximum number of shares a public shareholder, together with affiliates acting as a "group," may exercise its conversion right);
• the SPAC cannot consummate a business combination if public shareholders owning in excess of a threshold amount (no higher than 40%) of the shares of common stock issued in the IPO exercise their conversion rights;
• the SPAC must consummate a qualified business combination within a specified time period (not to exceed three years) or the SPAC will be liquidated;
• the SPAC's founding shareholders must waive their rights to participate in any liquidation distribution with respect to all shares of common stock owned prior to the IPO or any private placement purchase in conjunction with the IPO (including for warrants);
• the underwriters in the IPO must agree to waive their rights to any deferred underwriting discount deposited in the trust account if the SPAC liquidates prior to completion of a qualified business combination; and
• if the securities of the SPAC are listed as units, the components of the units other than common stock (e.g., warrants) would be required to meet the applicable initial listing standards for the security types represented by the components.

Furthermore, the NYSE will have discretion to consider SPAC listings on a case-by-case basis, considering such factors as the management's experience and compensation, the restrictions on completing and approving business combinations and the extent of management's equity ownership.

Finally, the NYSE rules also include provisions providing continued listing standards for SPACs prior to consummation of a business combination, during the period between shareholder approval and consummation of a business combination, and after the business combination, and addressing the potential application of the NYSE rules on “back door listings” to SPAC transactions.

Conclusion

Historically, until 2008, SPACs could only be listed on the American Stock Exchange under listing standards that do not require an operating history. The new Nasdaq and NYSE rules codify some of the important shareholder protections already included in most SPAC structures and loosen the limitations on listing companies without an operating history for certain SPACs meeting the additional requirements. Listing SPACs on Nasdaq and the NYSE reflect the increased market interest in SPACs and should provide greater liquidity and market exposure for SPACs.