1.1 An introduction to SPACs
The sun is shining brightly in Kuala Lumpur in Malaysia in 2014. Mr Jeff Lobao is chief executive officer at Matrix Capacity Petroleum Bhd, a company seeking to acquire energy assets. The potential deal has been predicted to be one of the biggest IPOs in terms of SPACs fund raising. The eyes of the world are upon this historical listing on Bursa Malaysia. Nonetheless, at the end of August 2014, the Securities Commission of Malaysia rejects the IPO application of Matrix Capacity Petroleum Bhd, despite its excellent fund-raising IPO with investors, who have been tempted by the potential profit connected to equity securities and to the uncertainty of the business combination. One could be surprised when reading the decision to delist, which has been taken specifically after consideration of the managementâs lack of experience in the oil exploration and production business, following the application of tighter Malaysian Equity Guidelines for SPACsâ IPOs. Indeed, common-sense thinking brings us to consider uncertainty, and, in particular, the uncertainty of the business combination, as the main reason for delisting because of the impossibility of projecting or anticipating future management decisions.
This lack of experience has prevented the management from successfully directing a SPAC. On one level, it appears it is not the uncertainty of completing a business combination but the uncertainty of the board of directorsâ decisions that is seen as a âbadâ product of SPACs. For this reason, uncertainty itself is not seen as a negative element of financial systems, but it underpins what I will identify later as a core process of money creation.
First, SPACs are investment vehicles that pursue value maximisation by acquiring high growth target companies with high potential revenues. This translates in economic and philosophical terms into a reflection on risk and uncertainty in modern economies. Indeed, money creation and income generation processes are the main features of our capitalist system. Without risk-taking activities, the progress and wealth of the economy are destined to be irremediably hindered. In other words, risk is considered as an opportunity that has to be taken.1 In the same fashion, managers of SPACs are taking risks when they propose acquisitions in order to generate profits for their stakeholders. Furthermore, any income generation process is always understood as a form of uncertainty rather than risk. Indeed, according to Knight,2 while risk is a measurable entity, uncertainty itself is not capable of being measured, because it is a mysterious element connected to an âentrepreneurialâ instinct that can be understood only through a subjective reading of risk. This work will explore how those concepts of risk and uncertainty relate to modern economies, in order to present SPACs as financial products or financial innovations that are part of the discourse on risk and uncertainty in the contemporary paradigm of financial markets. SPACs give rise to their own features of risk and uncertainty that can also pose systemic risks for financial markets. For this reason, this work aims to discover whether the uncertainty profiles can be turned into manageable forms of risk-taking in order for SPACs to qualify as alternative investment vehicles. To achieve this objective, it is necessary to reflect on the role of law in financial markets in terms of financial regulation.3
The main question is centred on whether or not law, as an emanation of the state, should govern financial markets, and therefore money creation processes, which are informed by uncertainty. SPACs are investment vehicles that are not currently regulated on the markets, except for a few exemptions that will be examined in this work, and can be defined in general terms as âSPACs without lawâ.4 For instance, the Malaysian regulation of SPACs is dynamic, and it is influenced by Islamic law, which presents a different conception of risk and uncertainty in the markets, based on the evolving and dynamic concept of Gharar.5 Furthermore, the Securities Commission of Malaysia (i.e. the regulator) has implemented a possible sustainable regulation of uncertainty in relation to SPACs by virtue of âquasi-legal frameworksâ enacted through the adoption of soft law guidelines.6 Therefore, strictly speaking, Malaysia does not over-regulate SPACs because any regulation is commonly understood as the product of a state regulation, or at least of governmental agencies inspired by paternalistic imposition and supervision. By contrast, SPACs in Malaysia are regulated by Equity Guidelines that are a form of soft law regulation enacted directly by a regulator, and not by the state. Therefore, it can be argued that the Malaysian regulation of SPACs is entirely centred on a self-regulation approach which has been developed by the market itself as a form of market discipline, and then registered through the reception, or better, codification of such market practices into a soft law instrument, namely the Equity Guidelines. This is what I define as the codification of uncodified market practices.7
1 See further Chapter 3. 2 Frank Knight, Risk, Uncertainty and Profit (first published 1921, Martino Publishing 2014). 3 See Chapter 4. 4 See Chapters 2 and 4. 5 Daniele DâAlvia, âRisk, Uncertainty and the Market: A Rethinking of Islamic and Western Financeâ (2020) International Journal of Law in Context 1; Daniele DâAlvia, â(Legal) Uncertainty: Takaful between English Common Law and Shariâa Lawâ (2017) 10 (1) International Review of Law 1, 4. See also further Chapter 3 for the study of risk and uncertainty under Islamic Finance. 6 See Chapter 4. Indeed, this reading of the Malaysian regulation provides an understanding of SPACs as a financial innovation characterised either by a standardisation of market practices or a legal standardised regulation. Currently no legal standardised regulation exists except â as we shall see â for South Korea and Turkey.8 Therefore, it can be anticipated that the role of law in relation to financial regulation, and specifically in relation to SPACs, has evolved through fostering a market approach in which the law stays behind the scenes. This last sentence can also open a broader discussion as to whether law has ever succeeded in regulating financial instruments.
For these reasons, the next sections introduce the 2007â2010 financial crisis with a specific focus on the main features of risk and uncertainty in the markets that is further explained in respect of the upcoming new crisis determined by the external factor of the pandemic known as Covid-19. This is because in financial markets it is important to evaluate whether uncertainty can be regulated or controlled. Indeed, SPACs are mainly seen as risk-taking operators in financial markets. Their appetite for risk is high because SPACs are risk-takers. Nonetheless, it is also important to recognise that a risk-taking activity alone is never capable of generating profits. Indeed, as is explained below through a reading of Knight, uncertainty is the distinguishing feature of financial markets today; it is essentially the only element that can underpin money creation processes and profit.
The financial crisis is an important example for introducing those concepts of risk and uncertainty as well as evaluating whether risk management can constitute an efficient tool to avoid future crisis. SPACs, as is seen in the sections below, are vehicles through which risk and uncertainty is conveyed. For this reason, the financial crisis is seen as a macroexample of profit-making and failures, whereas SPACs represent a micro-instance of such economic mechanisms. Furthermore, this illustration serves as a theoretical background for further consideration of the role of financial regulation, and specifically the role of SPACs in a post-pandemic regulation environment.