SPACs and traditional IPOs: an offshore perspective

By Anthony McKenzie, Carey Olsen
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Offshore jurisdictions have long been a popular choice as listing vehicles and feature prominently on more than 20 exchanges worldwide.

On the leading US and Asian exchanges, Cayman Islands, British Virgin Islands (BVI) and Bermuda companies are the offshore heavyweights, with Cayman remaining the favoured jurisdiction for Asia-based sponsors looking to raise capital by way of an IPO.

麦安腾, Anthony McKenzie, Managing partner, Carey Olsen
Anthony McKenzie
Managing Partner of Singapore Office
Carey Olsen

For decades, the process for many Chinese and other Asia-based businesses to go public in the US was the traditional underwriter-led IPO. Despite increasing regulatory scrutiny on US-listed Chinese companies, Chinese businesses continue to follow this well-trodden path. Just this month, China’s ride-sharing business, DiDi Chuxing, filed for what will likely be the largest IPO in the US this year, using a Cayman company as the issuer.

Nearer to home, Cayman companies account for about 55% of issuers listed on the main board of the HKEX – far outnumbering any other domicile – and in 2020, about 95% of IPOs on HKEX used a Cayman company. That trend looks set to continue in China following the 2019 launch of the Star Market, where the first IPO of a foreign “red-chip” company was a Cayman issuer. To date, 100% of red-chip companies registered (or awaiting registration) on the Star Market are Cayman vehicles.

Offshore SPACs

2020 saw the resurgence of special purpose acquisition companies (SPACs) as an alternative to traditional IPOs, particularly on US exchanges. A SPAC does not have an operating business – it is a “shell” company formed for the purpose of raising capital through an IPO for use in a subsequent merger or acquisition of a target company (known as a “de-SPAC transaction”). Taking a private company public via a de-SPAC transaction can be achieved on a faster timeline than a traditional IPO, at a lower cost, and with a greater degree of certainty around valuation.

There were 248 SPACs launched on US exchanges in 2020, raising a war chest for acquisitions of USD83 billion. The SPAC boom continued into this year, with more SPACs launched in the first quarter of 2021 alone (298) than in all of 2020. However, only 32 SPACs were launched in April and May.

Most SPACs formed by sponsors pursuing US targets are incorporated in Delaware. The vast majority of SPACs formed by sponsors pursuing targets outside the US are incorporated offshore – with Cayman dominating, but BVI also popular – to allow for a more efficient structure following the de-SPAC transaction, and to minimise any tax or legal complexities that may arise as a result of using a US entity. About a third of all SPACs launched in 2020-2021 were incorporated in Cayman. Cayman limited liability companies (LLCs) are also increasingly being formed instead of Delaware LLCs to act as the sponsor vehicle.

The author continues to see interest from a broad range of Asia-based sponsors and investors, including Chinese fund managers and family offices, for listings of offshore SPACs on US exchanges. The author also sees many offshore SPACs looking East to explore opportunities in China and Southeast Asia for de-SPAC transactions, where a number of venture capital and private equity-backed emerging companies with compelling growth prospects are located.

Although the Nasdaq and NYSE currently have the lion’s share, several Asian jurisdictions are now considering allowing SPAC listings in their home markets. At present, South Korea and Malaysia are the only two Asian countries that permit them. Given the success of the SPAC format, HKEX and the Australia and Singapore exchanges are now engaged in public consultations in order to explore changes to their listing rules that would allow SPACs to list, with certain conditions.

As more SPACs begin to list outside the US, and greater interest is generated from Asia-based sponsors, expect the use of Cayman, BVI and other offshore companies to continue to increase in relation to Asia-connected SPAC transactions.

Why are Cayman and BVI so popular for SPACs and traditional IPOs? The answer is relatively simple: Both jurisdictions offer political and economic stability, a trusted legal system (with roots in English law), tax neutrality, speed to market and lower costs, while continuing to align with international gold standards. Cayman and BVI vehicles have been central to deal flows in China since the late 1980s, are well understood across the rest of Asia (and in the US), and are widely accepted by global exchanges, institutional and private investors, lenders, rating agencies, underwriters and regulators.

Some particular advantages of Cayman and BVI company law include:

Flexibility. Laws are progressive and allow Cayman and BVI companies to tailor their articles of association to cater to sponsors’ needs, and to the listing rule requirements of the relevant exchange. For example, a company may in its articles implement certain provisions to allow for the issue of warrants and different classes of shares suitable to the SPAC model, regulate a SPAC’s entry into a de-SPAC transaction, cater for defensive takeover tactics such as “staggered boards” and “poison pills”, allow for weighted voting rights and/or provide for additional shareholder protections. Cayman and BVI companies may have unrestricted objects in their articles, which is crucial for SPACs with broad investment mandates.

Mergers, takeovers and migrations. Both Cayman and BVI have straightforward statutory merger regimes, modelled on Delaware law, which are conducive to de-SPAC transactions.

In both jurisdictions, there is no takeover code or legislation applicable to listed companies unless that company is regulated in the BVI or Cayman or, in the case of a Cayman company, is listed on the Cayman Stock Exchange. Nor are there any statutory prohibitions on financial assistance or restrictions in respect of defensive mechanisms that the board of directors could utilise in respect of actual or potential takeover or merger offers, subject to their usual fiduciary duties.

It is also possible to migrate Cayman and BVI companies to other jurisdictions, and vice-versa, without triggering a disposal of assets or requiring a novation of liabilities.

These features offer flexibility and creative solutions to any pre-IPO restructuring and/or acquisition, outside of a typical share swap. They are also particularly ideal for SPACs as they offer a quicker, lower cost, and a simplified process when it comes to the acquisition of target companies.

Geopolitical developments between the US and China heightened regulatory scrutiny of US-listed Chinese businesses by US regulators, and potentially higher trading multiples upon a re-listing in China (or Hong Kong) are key drivers for the recent spate of take-private transactions of Cayman and BVI companies by way of schemes, tender offers and statutory mergers.

Regulatory considerations. There is no need to register or file a prospectus for companies making public offers outside Cayman or the BVI. The issuer may therefore focus on the listing rule requirements of the relevant exchange without the need to consider any additional layer of Cayman or BVI law requirements. Equally, there is no need to obtain the approval of any regulatory authority, in either Cayman or BVI, in respect of the issue or transfer of shares (or depositary receipts).

Directors. No directors or officers are required to be resident in Cayman or BVI.

FPI status. If structured properly, a Cayman or BVI company listed on a US exchange may be eligible to qualify as a “foreign private issuer”, allowing it to take advantage of reduced disclosure and reporting requirements, certain exemptions from US proxy rules, and the ability to apply certain “home country” standards in respect of key corporate governance practices.

Looking ahead

Although interest in SPACs has skyrocketed and now rivals the traditional IPO in popularity, the author continues to see a steady flow of traditional IPO work for Chinese (and Southeast Asian tech) businesses using offshore structures, particularly for listings on the Star Market, Nasdaq and NYSE.

There is some speculation about whether the SPAC IPO bubble is about to burst. The SPAC frenzy witnessed throughout 2020 and the first quarter of 2021 has recently tapered off as a result of the US Securities and Exchange Commission’s increased scrutiny of, and guidance issued to, SPACs in April this year. However, Asian sponsors and potential target companies in the region remain bullish on SPACs.

What is certain is that Cayman and BVI will continue to remain central to global capital and M&A markets as more Asia-based SPACs are launched and large numbers of cashed-up SPACs race to identify merger targets. If 2020 was the year of the SPAC, 2021 may well prove to be the year of the de-SPAC.


Anthony McKenzie is the managing partner at Carey Olsen’s Singapore office. He can be contacted on +65 6911 8311 or by email at anthony.mckenzie@careyolsen.com