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02 September 2008

Al Hudec on Spacs

Will TSX SPACs Restore the Canadian IPO Market? by Al Hudec The TSX has proposed rule changes to permit US-style SPAC listings in Canada. A SPAC is a �special purpose acquisition corporation’ formed to raise a minimum of $30 million to pursue an �as yet to be identified’ acquisition opportunity. If the new TSX rules are implemented, they may help rejuvenate the currently moribund Canadian IPO market. Three structural elements are key to setting up a TSX SPAC. First, at least 90% of the gross proceeds from the SPAC’s IPO must be segregated in a trust fund and used solely for a qualifying acquisition; second, the acquisition must be approved by a majority of shareholders, with shareholders who vote �no’ having the right to �cash out’ by converting their SPAC shares into a pro-rata share of the cash in the trust fund; and third, the SPAC must complete an acquisition with a value of at least 80% of the value of its trust fund within 36 months, or liquidate and distribute the cash in the trust fund to investors. In today’s tight credit markets, SPACs represent a potentially significant pool of cash managed by promoters who are highly incentivized to consummate an acquisition transaction. The SPAC’s founders receive cheap shares, usually representing 20% of the SPAC’s post-IPO equity, which are forfeited if the SPAC does not complete an acquisition on a timely basis. If a SPAC does not complete an acquisition within 36 months, it must be liquidated and its trust fund distributed to investors. TSX SPACs represent a possible bright spot in an otherwise gloomy Canadian IPO market. Generally, it can be expected that most SPAC acquisitions will be significantly larger than the SPAC itself since, In addition to the cash in the trust fund, most SPACs are likely to issue further equity as an acquisition currency and to use debt to help fund a leveraged acquisition. Whether or not SPACs realize their full potential depends on the quality of the promoters attracted to the SPAC market and on the quality of the acquisition prospects that they generate for the first generation of Canadian SPACS. Al Hudec is a partner at Farris, Vaughan, Wills and Murphy LLP in Vancouver, BC. He can be contacted at .(JavaScript must be enabled to view this email address) Download the PDF file here.

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