Creating more investment SPAC: Angel funds based on SPAC structure can bring liquidity for SME platforms

November 19, 2020 5:00 AM

A SPAC offers a route for retail investors to get a flavour of private equity investment and for the acquired company, it becomes an alternative route to go public. In all, it appears to be a win-win.

An angel fund will typically have a reputed 'sponsor', who may either be a serial entrepreneur or an established venture capital investor.

By Kaushalya Venkataraman

Special purpose acquisition companies or SPACs have been the buzzword in the venture capital and financial markets this year. As per the Securities Industry and Financial Markets Association (an industry trade group in the United States of America), 2020 has been the year of SPACs with the deals valued at $22.2 billion through July 2020.

So, what exactly are SPACs? A SPAC is what is commonly known as a ‘blank check company’ or a company that has no commercial operations and has been incorporated by a prominent founder/ investor, whose sole purpose is to raise capital through an initial public offering and to use the proceeds of the IPO to acquire unspecified companies. The acquired company then merges with the SPAC and becomes a publicly-traded company.

The prospectus of a SPAC usually details the achievements of the founders and their track record. In accordance with securities regulation in the US, the proceeds of the IPO are kept in an escrow account/ interest-bearing trust account and cannot be utilised until the acquisition is complete. Typically, the shareholders also have the ability to vote on acquisition proposals. If they do not consent to a particular acquisition which goes through with the requisite majority, they also have the ability to redeem their shares. Additionally, SPACs have a limited shelf life, so if the SPAC does not complete an acquisition (its sole purpose) within a specified time frame (generally two years), it must return the IPO capital back to the investors.

A SPAC, thus, offers a route for retail investors to get a flavour of private equity investment and for the acquired company, it becomes an alternative route to go public. In all, it appears to be a win-win.

From an Indian perspective, though there have been instances of foreign SPACs acquiring Indian companies, India, as such, does not recognise a SPAC structure. Shell companies in India cannot go public as there are net worth and track record requirements under Indian securities regulations.

However, if we were to work within the regulatory landscape of India, there may be a few viable alternates. One such alternative may be a specialised category of Category-I AIF which is an angel fund listing on the SME platform. The SME platform is for companies that are small or medium in size, and the investors on this platform are more like private equity investors.

An angel fund will typically have a reputed ‘sponsor’, who may either be a serial entrepreneur or an established venture capital investor. The angel fund will issue units of investment to angel investors, who must satisfy certain requirements, such as having a net worth of at least Rs 20 million (excluding their principal residence) and eligibility criteria such as having early-stage investment experience. The angel fund then pools in the money of the angel investors and invests in ‘venture capital undertakings’. Angel investors have the ability to either participate or reject any round of financing. It would be worthwhile to consider if the securities regulator would permit a special category of angel fund to list on the SME platform (provided the net worth criteria for listing on the SME platform were met) which would then raise money from a special set of investors, namely ‘angel investors’. This angel fund would then identify and acquire a company which it would later merge into. In a sense, it would be similar to a SPAC, and the hybrid structure would ensure that only specialised investors would have the ability to take part in the investment. This move may perhaps bring in much-needed liquidity in the SME platform as well.

The author is Partner, Chandhiok & Mahajan Advocates and Solicitors. Views are personal

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