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STARs, SPACs and IPOs – A Guide to Cayman Islands Star Trusts and Special Purpose Acquisition Companies

What are Special Purpose Acquisition Companies?

Special purpose acquisition companies (SPACs) are enjoying something of a renaissance. Unlike the traditional private equity model, SPACs raise funds through an initial public offering (IPO) with the proceeds subsequently being invested in the acquisition of, or merger into, certain existing target companies. SPACs are raising increasing levels of capital and the proportion of the overall IPO market they represent is at a record high. The NASDAQ stock exchange has had more than 100 SPAC IPO listings since 2011 with the momentum not expected to abate.

SPACs are typically incorporated in the Cayman Islands (Cayman) as an exempted company with a small group of initial investors, and a management team. Cayman companies are a popular listing vehicle with for instance more than 36% of all companies listed on the Hong Kong Stock Exchange being Cayman companies. The management team is comprised of professionals with experience in the sector into which the SPAC will invest. The management team will typically sit on the SPAC’s board of directors and be authorised via the listing and constitutional documents to identify certain target companies post-IPO. The constitutional documents of the SPAC will ensure that the management team is prevented from acquiring, or merging with, target companies without the prior approval of the investors (typically a super-majority requirement).

By taking this approach, SPACs provide investors with access to speculative transactions in one or more specified sectors and industries, in particular where there is an unknown element of risk, or specific geographic regions in which they might not otherwise be able to take advantage of. There is also no diversification objective: a SPAC may engage in only one single business combination. Investors also enjoy greater control over investments, potentially increased liquidity (given their capital is not locked-up for a number of years as with a traditional private equity fund) and reduced management fees, rather than annual fees, as the management team members are compensated via their initial shareholding in the SPAC.

If the management team fails to identify such targets within a certain timeframe (usually around 1 to 2 years) the SPAC is dissolved and any remaining funds are distributed back to investors. It is a SPAC’s “money back” feature which enhances liquidity.

 

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STARs, SPACs and IPOs – A Guide to Cayman Islands Star Trusts and Special Purpose Acquisition Companies

 


Robert Lindley
Counsel, Head of Cayman & BVI Private Client & Trust

British Virgin Islands, Cayman Islands   +1 345 814 7360


Peter Ch’ng
Partner

Hong Kong   +852 2842 9593
Mobile  +852 6469 3378


Matthew Stocker
Partner

Cayman Islands   +1 345 814 7382


Wesley O’Brien
Associate

Cayman Islands   +1 345 814 7350


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