IPO ... Cliq Energy

Although Hibiscus is no longer a SPAC, having completed the qualified acquisition early 2012 of oil concessions in the Middle East, the company has yet to produce cash flow because commercialization of its oil fields is scheduled only 2013.

Under these circumstances, SPAC companies must rely on well heeled individuals, private equity groups and boutique funds.

According to SC, a SPAC is basically a shell company that has no operations but goes public with the intention of merging with or acquiring operating companies or businesses with its IPO proceeds. Companies that qualify are given three years to complete a qualified acquisition or QA, failing which 90% of the IPO proceeds must be returned to investors.

For the case for Cliq, it must raise at least rm150 million – minimum amount stipulated by the SC for any SPAC IPO – to fulfill its aspiration in the E&P segment. The company will focus on acquiring oil and gas assets categorized under ‘Reserves and/or Contingent Resources’, which will bring in cash flow sooner rather than those still in the early exploration stage.

There are three categories of shareholders: the first are the promoters or management team who put the deal together; the second are the initial investors who got in before the IPO stage, and the third are the IPO investors.

Based on Cliq’s draft prospectus, the promoters or management team will only own 20% of the company upon listing, while the initial investors will get between 2.33% and 7.27% and the IPO investors, from 72.73% to 77.67%. The amount raised could be from rm150 million to rm500.25 million.

All investors, including the promoters, get one free warrants for each subscribed in Cliq. However, the entry cost is vastly different. Promoters or management got their Cliq shares at only one sen each, the initial investors at 45 sen and IPO investors at 75 sen.

The huge discount given to promoters/management and initial investors came with varying forms of moratoriums. For promoters and management of SPAC, their shares and warrants are not tradable until the completion of the QA. In Cliq’s case, management has itself imposed additional moratorium that such shares and warrants held by them are strictly not tradable within three years of listing, even if the QA was completed earlier.

As for the initial investors, their shares will be subject to the same moratorium imposed on the promoters and management but they are free to trade the warrants.

For IPO investors, there is no moratorium on the trading of their shares and warrants, except that all warrants, including those held by promoters and initial investors, cannot be exercised until the completion of the QA.

As the QA is not completed within the three year time frame stipulated by the SC, the downside to the IPO investors would be just 10%. That’s because 90% of the IPO proceeds (10% will be utilized as working capital and to defray listing expenses) are refundable and only to the IPO investors. On top of that, they can sell the warrants in the market to make some profit or to recover some cost.

The initial investors would not get the refund but they can sell the warrants to recoer some of the costs. However, the promoters or management stand to lose all of their investments if they cannot complete the QA within the time frame.

However, after the completion of the QA where a bulk of the IPO proceeds would have been spent, the risk would be for all to share as the SPAC becomes just like any other listed company. In other words, the shares could be on a free fall if oil could not be extracted from the concessions purchased.

Nevertheless, the condition is that the QA must be approved by the majority of shareholders representing at least 75% of the total value of shares held by those present at an EGM. The management and persons connected to the management team must abstain from voting.