Given the increasing popularity of special purpose acquisition companies (SPACs) and the desire to retain London’s competitiveness in the IPO space, on 31 March 2021, the Financial Conduct Authority (FCA) announced its plan to consult on SPAC-related amendments to its listing rules and associated guidance. The FCA plans to remove the requirement for suspension of trading of a SPAC upon the announcement of an acquisition, and also plans to update related guidance to strengthen protection for investors in SPACs. The restrictive nature of the suspension requirement has seen the UK lag behind the United States and certain EU jurisdictions in the recent SPAC “boom,” and its removal could enable UK SPAC investors and companies to benefit from this recent trend in the global investment space.
What Is a SPAC?
SPACs are “cash shell” companies, set up by sponsors with the sole purpose of raising money through an IPO to acquire another company, and take that target company public. They are not trading companies, and their only assets tend to be the cash proceeds of their IPO.
Once a SPAC has raised money through its IPO, that cash will sit in an interest-bearing trust account until the SPAC’s sponsors identify an acquisition target. Commonly, when a SPAC is formed the sponsors will, as part of the SPAC’s investment policy, identify a certain industry and/or geographical area for their intended target (e.g., American tech or fintech companies), but investors will not know what the specific acquisition target will be. This freedom afforded to SPAC sponsors has led to a coining of the term ”blank cheque companies.”
When a SPAC’s sponsors identify an acquisition target, they will make an announcement to that effect. The acquisition must then be approved by a majority of shareholders. Typically, SPAC sponsors will have up to two years to identify an acquisition target, else the SPAC will be liquidated and the monies returned to investors.
The SPAC “Boom”
SPACs are not a new concept, but they have recently experienced a surge in popularity. In 2020, 248 SPAC vehicles were listed in the United States, raising the dollar equivalent of £63.5 billion. (See 3 March 2021 UK Listing Review, p. 29.) This popularity recently spread to Europe, with notable major SPAC listings on the Amsterdam and Frankfurt stock exchanges in 2021. By contrast, the UK SPAC market is dormant, with only four UK SPACs listed in 2020, raising only £30 million
There are a number of factors behind the SPAC boom, including the following:
- Speed of taking a company public. Traditional IPOs can take years for companies to put in place, having to comply with a number of burdensome disclosure obligations and undertaking the arduous task of courting investors. By contrast, going public via a SPAC means the target company only needs to be acquired (by the SPAC), rather than going through the listing process, which can reduce the timeline for going public to just a few months.
- Certainty. Traditional IPOs introduce significant uncertainty, as IPO fundraising can be affected by a range of factors, including investor appetite for a particular business or sector, changes in investor/market sentiments, and the risk that an inability to garner support from key institutional investors could deter other investors. If these factors conspire to the detriment of the offering company, its share price could be significantly lower than expected and, in the worst-case scenario, the company could fail to meet the minimum IPO capital requirements, leading to the IPO being aborted and the target company saddled with significant abortive costs and reputational damage. Going public via a SPAC reduces these risks. Funds will have already been raised from a successful IPO, and the company will be able to negotiate with the SPAC’s sponsors to set the company’s share price at a level agreeable to both. In times of market volatility, this certainty is extremely desirable to companies and sponsors alike.
- Cost. Given the shortened timeline associated with SPACs, and the reduced reporting and disclosure requirements, transaction costs can be significantly reduced for companies that choose to go public via a SPAC instead of an IPO.
The Hill Review
In November 2020, as the UK lagged behind the United States in the SPAC boom, Chancellor Rishi Sunak launched the UK listing review led by Lord Hill (the Hill Review). The Hill review examined UK public markets and made a series of recommendations with the aim of strengthening the UK’s position as a leading global financial centre.
One of the key areas of consideration for the Hill Review was the loosening of the UK’s SPAC regime. It identified a dangerous perception that the UK is not a viable location for SPAC listings, which it suggested is leading UK companies to seek a U.S. or EU SPAC route. Whilst the Hill Review identified several reasons why UK SPAC financing has not emerged at the scale of the United States, one of the key factors is the rule whereby trading is suspended in SPACs upon the announcement of an acquisition (the Presumption). The Presumption is seen as a key deterrent for potential UK SPAC investors, as investors could be locked into their investment for an uncertain period following the identification of an acquisition target. (See 3 March 2021 UK Listing Review, p. 30-31.)
In view of this, the Hill Review recommended removal of the Presumption, to be replaced with alternative investor safeguards. These include developing the information that SPACs must disclose upon the announcement of an acquisition target, the rights of SPAC investors to vote on acquisitions prior to their completion, and investors’ rights to redeem their investment prior to completion of an acquisition.
FCA Consultation
On 31 March 2021, following the recommendations of the Hill Review, the FCA announced that it would consult on amendments to its listing rules and related guidance to strengthen protections for investors in SPACs. It plans to consult on the introduction of a minimum market capitalisation and a redemption option for investors, which will help to ensure that SPACs operate within a framework of high regulatory standards and oversight. These protections should enable the removal of the Presumption.
The FCA intends the consultation to be open for only four weeks, and for the new rules and/or guidance to be in place by early summer.
Comments
The changes proposed by the FCA will be welcome additions to the UK listing framework, and will enable UK SPAC financing to benefit from the SPAC craze experienced in the United States and in mainland Europe. However, it remains to be seen whether the removal of this regulatory barrier will lead to a boom as dramatic as that seen in the United States.
The Presumption certainly reduces investor confidence in UK SPACs. However, a number of other considerations are potential factors behind the UK’s poor performance in the SPAC financing sphere. These include market scepticism due to a perceived lack of due diligence by SPACs into acquisition targets, and concerns that the oversaturation of the SPAC market could lead to overvalued target companies, as a proliferation of SPACs all vie for the same target companies.
Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, any of the issues discussed above.