East Stone Acquisition Corp. Files $100M SPAC IPO

East Stone Acquisition Corp. (ESSCU), filed for a $100 million IPO this morning, making it a total of seven SPACs on file now for 2020.  East Stone will be focusing on fintech in North American and the Asia Pacific regions, and will be led by Chunyi (Charlie) Hao, as Chairman and CFO, and Xiaoma (Sherman) Lu, as CEO and Director nominee.

As for the particulars of the team, Mr. Lu is a founding partner and has been a managing director of East Stone Capital Limited, a private equity firm focusing on emerging industries, since October 2017. However, the rest of his background has a number of additional positions in other investment firms focusing on a variety of industries. Additionally, Mr. Lu served as the executive vice president of China Shenzhen Stock Exchange, overseeing public company governance and securities offerings from November 2012 to May 2015.

Looking at Chunyi (Charlie) Hao, the Chairman and CFO of this SPAC, he is also a founding partner and managing director of East Stone Capital Limited, but more importantly, Mr. Hao has previously served on two prior SPACs.  The first being 2005’s Asia Automotive Acquisition Corporation, as President and Director, the second was 2008’s China Fundamental Acquisition Corporation, as CEO and Director.  Asia Automotive combined with Tongxin International Ltd. (TXIC.PK), and China Fundamental combined with Wowjoint Holdings Ltd. (BWOWF.PK).  As with many of the SPACs that came forth around the financial crisis, their share prices fell off a cliff in 2009 and never really recovered (for various reasons, but the financial crisis certainly didn’t help).  And while Mr. Hao’s SPAC experience is from roughly a decade ago, it’s still SPAC experience and that counts for something.

However, looking at this SPAC’s structure we see a 100% in trust, 15 months (plus two 3-month extensions for $0.10 to trust each), 1 warrant for 1/2 share + 1 right (1/10), which is typical for SPACs searching within Asia.  Plus, East Stone has included the Crescent Term with a bump up to a $9.50 threshold, rather than a $9.20 threshold, which is becoming more common as of late for the smaller sized deals.  Again, we’re seeing a bifurcation in SPAC terms between the larger A++ teams and the sub $100 million deals.

However, an additional item of note is the underwriter “business combination marketing fees”, which in general, refers to the back-end fee.  Some SPACs call this a “deferred fee”, which generally implies more services than just marketing.  But there a number of underwriters who prefer to consider this a “marketing fee”.  EarlyBird, in particular.  Additionally, whereas 3.5% or 3.0% is more common, I-Bankers has reduced theirs to a 2.75% fee.  AND…that’s subject to the amount of shareholder redemptions. Per the proxy:

Pursuant to our agreement with I-Bankers:

• (i) if the amount of cash held in the trust account immediately prior to the business combination, after redemptions, is at least 50% of the gross proceeds of the offering hereunder, then the advisory fees payable to I-Bankers will be 2.75% of the cash remaining the trust account in cash,
• (ii) if the amount of cash held in the trust account immediately prior to the business combination, after redemptions, is less than 50% of the gross proceeds of the offering hereunder, then the advisory fees payable to I-Bankers will be 1.375% of the gross proceeds of the offering, and
• (iii) notwithstanding (i) and (ii) above, if the amount of cash held in the trust account immediately prior to the business combination, after redemptions, is less than $20,000,000, then the advisory fees payable to I-Bankers will be paid in a combination of cash and securities in the same proportion as the cash and securities consideration paid to the target and its shareholders in the business combination, provided that in no event shall the cash portion of such advisory fees under (ii) or (iii) above be less than $1,000,000.

So basically, I-Bankers is incentivized to market this hard.

Lastly, Hua Mao and Cheng Zhao, who are listed as advisors to the transaction, are also the “Anchor Investors” and are participating in the private placement of units at IPO.  However, they’re only participating for 108,000 units.  $1.08 million worth of units on a $100 million SPAC (1%) doesn’t feel so much like an “anchor”, but more like some ankle weights.  But okay, Anchor Investors it is.

To sum up, in a market where so many SPACs in 2019 debuted with miserly terms for investors, East Stone’s terms look pretty juicy in comparison. As such, this deal shouldn’t have much trouble at IPO.  Plus, now that SPACs have gotten so hot again, the terms pendulum has swung back to SPAC teams and pretty much anything and everything is selling.  Which also means SPAC teams can negotiate a little harder on the underwriting fees.  As such, East Stone’s 1.75% upfront underwriting fee and 2.75% marketing fee could be a harbinger of fee reduction in future SPACs, so it’s something we’ll have to keep an eye on as competition in the underwriting league heats up too.

Summary of terms below:

I-Bankers Securities is sole book-runner.
Ellenoff Grossman & Schole LLP & Schiff Hardin LLP are issuer’s counsel and underwriter’s counsel, respectively.
WithumSmith+Brown, PC is auditor.