SPACs are types of public shell or blank-check companies established with the sole purpose of merging with or acquiring existing private firms.
They allow a private company (or many companies) to go public without having to endure the lengthier, more costly, and complex IPO process.
SPACs are temporarily listed on the exchange and have two years to acquire and merge with their targets (‘de-SPAC’) or risk being delisted.
SPACs were the mechanism through which Egypt-born firm Swvl – the region’s first unicorn – as well as the Lebanon-based Anghami listed on NASDAQ Dubai.
On 28 July 2024, the Financial Regulatory Authority (FRA) introduced amendments to the rules for listing and delisting securities on the Egyptian Exchange (EGX), effectively greenlighting the establishment of special purpose acquisition companies (SPACs).
In collaboration with Catalyst Partners – a private equity firm focused on the MENA region and the first official player to submit a request to the FRA to establish a SPAC under the name Catalyst Partners Middle East – our advisory experts unpack the new regulations and what they mean for the market.
Through FRA Decisions No. 140 and 148 of 2024, the regulator lifted obstacles that stood in the way of listing and trading SPACs on the EGX and outlined several regulatory requirements:
The new regulations also address the prospect of allowing SPACs to expand their shareholder base, such that the latter would also integrate retail investors, subject to meeting conditions set by the FRA. These conditions primarily pertain to profitability and surpassing the minimum threshold of 300 shareholders.
The FRA has long foreshadowed the introduction of SPACs to the market following a surge in their popularity in 2020, particularly in the US. However, SPACs have fallen out of favor globally due to a lax approach to valuations and due diligence, causing share prices to sink and leaving companies scrambling to raise funds or even bankrupt.
According to analysis by Catalyst Partners, the latest regulations coming out of Egypt seek to address these issues by providing more stringent conditions that preserve shareholder value:
| Global SPAC outcomes | Egypt SPAC regulations |
| Company structure often takes the format of a trust. |
Company structure takes the format of a venture capital (VC) outfit, thereby carrying the requisite regulations levied on VC firms, including Capital Markets Law 95/1992.
This means the company is bound by strict regulations on: 1. How funds are raised 2. Disclosure requirements 3. Their net asset value, which must be assessed every year and reported to the regulator |
| SPAC is created, funds are raised, and the company goes public immediately. | SPACs must issue a private placement to only pre-determined, qualified investors – a designation regulated by the FRA. |
| Pressure to act fast on an acquisition after collecting the IPO proceeds often leads to decisions based on lenient due diligence and optimistic valuations. At the same time, as a trust, valuations are made on pro-forma accounts. |
The process for targeting a potential acquisition must follow General Acquisition Procedures, which include the appointment of an Independent Financial Advisor (IFA) to value the company and submit an IFA report that must be tendered to the FRA for approval.
Valuations are made based on:
1. Two years of financial statements qualified by an independent, third-party auditor; and 2. A five-year business plan. |
| Shareholders are not always aligned on the acquisition target, leading them to pull out, sinking the share price and creating a cash shortage. |
A Subscription Agreement Form is issued to investors that outlines the sectors the SPAC intends to look into, acquisition targets, and overall roadmap for the future.
Once signed by investors, this effectively greenlights these objectives, reducing the chances of investors pulling funding. |
| The company is listed and the share price is determined by market dynamics. Retail investors being part of the process from the outset opens the door to share price volatility. |
When the company lists, it trades at par value until:
1. It issues one year of audited financial statements; or 2. It issues a second IFA report with a clear five-year business plan and fair value for the share price, which the FRA must approve and then allow the stock to trade publicly at that price.
Retail investors therefore cannot trade shares until a fair value is determined, protecting the company from speculative trading that could erode its value. |
| Little-to-no disclosure and reporting requirements | Strict reporting and disclosure requirements are necessitated from the outset. |
| SPACs may acquire more than one company, and regulations dictate that they all must be merged – a process often so complex and lengthy it can cause the share price to sink, necessitating that the company raise funds once again to plug the gap in capital until the merger is completed. | SPACs may acquire several companies, but only one company can be merged and the rest become subsidiaries under the merged company. |
Our goal is to guide clients through this new landscape, providing the expertise and insights needed to succeed. Our services include:
For more information on how we can assist you, please contact our team.
