FSS Warns General Investors About SPAC Investments: "Losses Possible Even If Merger Succeeds"

The Financial Supervisory Service (FSS) has urged caution regarding investments in Special Purpose Acquisition Companies (SPACs). This is due to concerns that sponsors such as securities firms have more favorable trading conditions compared to general investors, and that institutional investors lack sufficient checks on sponsors.

According to the FSS on the 9th, the number of SPAC initial public offerings (IPOs) showed an upward trend each year until last year. The number increased from 19 cases in 2020 to 25 in 2021, and reached 45 last year.

A SPAC is a publicly listed shell company whose sole business purpose is to merge with another company. It provides promising unlisted companies with stable funding and an opportunity to go public. For investors, it offers a chance for corporate value appreciation through the merger.

After establishment, a SPAC undergoes an IPO, then merges with an unlisted company or dissolves if the merger fails. Sponsors, composed of securities firms (lead founders), venture capital (VC), and asset management companies, act as founders at the time of SPAC establishment. Securities firms serve as lead founders, IPO underwriters, and merger advisors, leading the overall process including establishment, management, and merger.

The average IPO size is 9 billion KRW, and the public offering price (investment price for general investors) is typically 2,000 KRW, which is twice the sponsor investment price (usually 1,000 KRW). After the IPO, shareholding ratios are approximately 10.5% for sponsors, 73.7% for institutions, and 15.8% for general investors. Securities firms, as underwriters, received fees of about 300 million KRW per case or 3% of the public offering amount.

From 2019 to September 2022, among 54 SPACs that completed mergers, various industries such as machinery and parts manufacturing were targeted. The average equity value was about 74.8 billion KRW (approximately 8.4 times the IPO size). This increased by 51.4% from 68.5 billion KRW in 2021 to 103.7 billion KRW last year. SPAC merger prices tend to be discounted compared to the standard market price, while the merged companies tend to be valued at a premium compared to their intrinsic value. Institutional investors sold 95.4% of their shares before the merger, resulting in only 24.4% voting rights at the merger shareholders' meeting.

When the merger succeeds, general investors earned 5.2 billion KRW in profits, which is 62.1% of their invested principal (8.3 billion KRW). Sponsors earned 3.9 billion KRW, or 210.0% of their invested principal (1.9 billion KRW). In case of merger failure, more than 90% of the public offering amount is deposited and priority is given to the payment of held assets, so general investors did not experience losses on their principal. However, sponsors can only claim residual assets subordinately, resulting in losses.

The FSS explained, "There are concerns about trading conditions favoring sponsors over general investors and insufficient checks by institutional investors on sponsors. Securities firms may pursue mergers contrary to general investors' interests due to low investment prices, advisory roles, and losses in case of merger failure. Institutional investors mostly sell their allocated IPO shares before the merger, limiting their ability to assess the appropriateness of merger prices and to check sponsors."

Accordingly, the FSS advised that even if a merger is completed, investment losses may occur, and that sponsors’ acquisition prices for SPAC shares are about half the price paid by general investors at the IPO. It also emphasized the need to carefully decide on investments by checking the basis for merger price calculations, past advisory records of merger advisors, post-merger stock price trends, and institutional investors’ voting rights ratios.

An FSS official stated, "We plan to strengthen reviews to ensure that conflicts of interest among investment parties are thoroughly disclosed in SPAC IPO and merger securities filings. We will expand communication by holding meetings with securities firms and market and academic experts to discuss improvement measures for concerns, and continuously and actively identify and organize areas needing supplementation so that SPACs can grow into healthier products in the future."

This content was produced with the assistance of AI translation services.