Special purpose acquisition companies (“SPACs“) have experienced a surge in their popularity in the recent years. In the United States (“US“) market, SPACs have raised $83 billion (£63.5 billion) in 2020 and $88 billion (£63.1 billion) in the first quarter of 2021.[1] Whilst SPAC activity has been strong in the US for a number of years, listings in the UK are moving at a much lower pace totalling only £0.03 billion in 2020 in comparison. Structural differences between the UK and US’ SPAC regimes seems to be the main reason for such disparity. The Financial Conduct Authority (the “FCA“) has recently announced its intention to consult on amendments related to the UK listing rules in order to ensure investor protection in the SPAC market and place the UK as a competitive market to raise capital.[2]
WHAT IS A SPAC?
SPACs have no underlying business and are set up with the sole objective of raising money through an initial public offering (“IPO“) to acquire or merge with an existing company (the “Transaction“).
SPACs’ founders (also known as “sponsors”) have generally two or three years to complete the Transaction after the IPO. If the sponsors are unsuccessful, they must either: (i) return the capital raised to investors; or (ii) request from investors an extension of the period to finalise the Transaction.
The funds raised in the IPO will be held in a trust account until the sponsors identify a target company and complete the Transaction.
Once the sponsors have selected a company for the Transaction, they will announce it to the shareholders who in turn will vote to decide whether or not they approve the consummation of the operation. Shareholders can either oppose the Transaction or agree with the proposed merger with the target company. In some markets, such as the US, shareholders are entitled to redeem their shares and receive the equivalent price paid in the IPO. Historically, UK shareholders have not been offered redemption rights.
WHY SPACS ARE SO POPULAR?
SPACs are attractive to investors for providing the opportunity to invest jointly with industry experts (the sponsors) which enhances chances of positive returns. Furthermore, the guarantee of receiving the amount invested in case the sponsors do not meet the deadline to find a target company or, in some jurisdictions, if the Transaction is not approved by shareholders, provides extra comfort to investors.
Moreover, an additional compelling reason for joining a SPAC deal is the fact that its IPO process is considerably shorter than that of the traditional IPO. The timeframe for completion of the traditional IPO is between two and three years whereas for SPACs this is reduced to only a couple of months.
The shorter IPO process and reduced disclosure obligations means that the cost of going public can be considerably diminished when compared with traditional IPOs.
LISTING RULES
The listing process for SPACs has a set of key features. Explained below are the main elements of such a process alongside a comparison between the UK and US listing regimes.
A SPAC’s IPO will either require a prospectus approved by the financial regulator or an admission document with minimum content imposed by the listing venue before the SPAC can be admitted to trading.
In some jurisdictions, such as in the US, shareholders’ approval is required for completion of the Transaction.
Moreover, as mentioned above, in certain markets where shareholders oppose the Transaction, they can redeem their shares and receive the equivalent to their investment in the IPO.
A particularity of the UK market is that trading of SPACs’ shares is normally suspended from the announcement of the Transaction until the FCA approved prospectus or admission document for the Alternative Investment Market venue (“AIM“) are published.
SPACs are also required to have a minimum market capitalisation which is the minimum market value for a company to continue to be listed on a stock exchange.
The SPAC entity sponsors will generally pay underwriting fees charged by investment banks when seeking to list SPACs on a stock exchange.
Typically, a SPAC will have two-years to identify a target company and complete the Transaction. However, some SPACs may obtain shareholder approval to extend this period.
Finally, SPACs’ sponsors generally agree to place restrictions on their founder shares for a specified period of time after consummation of the Transaction.
The below table sets out the main differences between the various listing regimes in the US and the UK that apply when listing a SPAC:
| US (Nasdaq or NYSE) | UK Standard Listing | UK AIM | |
| Listing document | Form S-4
|
FCA approved prospectus | AIM admission document |
| Shareholder acquisition approval | Yes | No | Yes |
| Redemption rights | Yes | No | No |
| Suspension on trading shares upon announcement of proposed acquisition | N/A | Yes | Yes |
| Minimum market capitalisation | Variable | £700,000 | £6,000,000 |
| Underwriting fee | 2% payable in cash at the closing of the IPO | Variable | Variable |
| Duration of the SPAC | Generally, 24 months but 12 or 18 months is also common
|
Usually 24 months | Usually 18 months (except if extension is granted by the shareholders) |
| Shares lockup | Generally, the lock up period during which sponsors agree to not sell their shares is 1 year | Generally, the lock up period during which sponsors agree to not sell their shares is 1 year | Generally, the lock up period during which sponsors agree to not sell their shares is 1 year |
FUTURE IN THE UK
On 3 March 2021, the UK Government published the UK Listing Review (the “Review”) setting out several suggested amendments to the UK listing process. The main purpose of the Review is to enhance the attractiveness of the UK as a market where companies can raise capital.
In relation to SPACs, the areas of reform proposed include:
- exclusion of the presumption that trading in the SPAC’s shares will need to be suspended on announcement of the Transaction;
- enhancing disclosure, including a minimum market capitalisation and a redemption option for investors; and
- acceptance of dual class share structures in the premium listing market.
THE FCA’S CONSULTATION
On 30 April 2021, the FCA published a 4-week consultation (“CP21/10“) on their proposed changes to remove the presumption of suspension for SPACs, subject to the satisfaction of certain regulatory requirements to enhance investor protection.
In the UK, SPAC listing is suspended once a target company has been identified for acquisition. Therefore, investors cannot sell their shares until completion of the Transaction, which is a feature that may discourage investments in SPACs. Despite the proposed amendments, the FCA intend to retain their power to suspend listing temporarily when concerns around market operation arise.
SPACs will still have to comply with rules in the Market Abuse Regulation and transparency rules in the FCA’s Disclosure and Transparency sourcebook.
SPACs expecting to benefit from the alternative regime must comply with the following rules:
- Size threshold
The FCA intends to establish a size threshold of £200m of aggregate cash gross raised on the amount raised at the date the SPAC is admitted to listing. This amount only includes money from public shareholders, meaning that sums invested by sponsors shall not be computed for this purpose.
- Ring-fence cash for acquisition, redemption or repayment purposes
The amount raised from public shareholders should be held by a third party to prevent misappropriation and/or funding of excessive costs incurred by sponsors. The funds raised should be used only to:
- acquire a target company;
- redeem shares from shareholders; or
- return capital to public shareholders in case of winding up of the SPAC for failing to find a target company or completing the Transaction within the established timeframe.
The FCA clarified that if the prospectus discloses that a certain amount of the capital raised will be used to fund the SPAC’s operation, then the proceeds to be ring-fenced can be reduced by those agreed amounts.
- Time limit for making an acquisition
SPACs may face a 2-year time limit of its operations and to find a target company. The intention is to reduce the uncertainty that investors might be exposed to. This time limit must be clearly stated in both the constitutional document and prospectus of the SPAC.
In case the 2-year limit is reached before the conclusion of the Transaction but after announcement of the target company to investors, the SPAC may require shareholders’ approval for a maximum 12-month extension of its operations.
- Board and shareholder approval of a transaction
Considering the incentives paid to sponsors upon the conclusion of the Transaction, the FCA understands that the selection of the target company is a sensitive matter and may raise conflicts between shareholders and sponsors’ interest. In order to manage potential conflicts of interest, the FCA suggests that during the process of identifying the target company, SPACs should:
- obtain Board approval of any proposed transaction, excluding from the Board discussion and vote any Board member that:
- is a director of the target or a subsidiary of the target, or who has an associate that is a director of the target or any of its subsidiaries; or
- has a conflict of interest in relation to the target or its subsidiaries,
- provide public shareholders with the right to vote on any acquisition, with a majority vote in favour being required to proceed with a deal. SPAC sponsors should be prevented from voting; and
- ensure shareholders are given sufficient disclosure on all terms and information on a proposed transaction necessary to allow an investor in the SPAC to make a properly informed decision.
The FCA also expects that investors are provided with important information related to the Transaction such as any conflict of interest in connection with SPACs’ sponsors and potential impact of dilutions on shares held by ordinary shareholders.
- Fair and reasonable statement on the terms of an acquisition
If a conflict of interest is identified in relation to one of the SPAC’s sponsors, independent advice from a qualified adviser should be obtained and such advice should be disclosed in a statement published by the Board declaring that the Transaction is fair and reasonable with respect to public shareholders.
- Redemption option for shareholders
The proposals include the offering of a redemption option to Shareholders. This would allow shareholders to sell their shares if they don’t approve the target company or are not satisfied with any aspect of the Transaction.
- The prospectus should clearly state the redemption price (which would suffer a discount to cover operation costs) which can be either a fixed amount or fixed pro rata share of the funds raised.
- Disclosure
SPACs are expected to disclose the following information in their prospectuses:
- information relating to ring-fenced arrangements,
- time limits for making an acquisition;
- commitment to publish a fair and reasonable statement;
- voting and redemption rights attached to shares;
- the full structure of the offer, including any warrants issued alongside shares and the terms of those instruments;
- details of the expertise of management;
- the strategy of the SPAC;
- identified risk factors; and
- conflicts of interest.
Additionally, to the extent possible, the target announcement should be accompanied by the following disclosures:
- a description of the target business, links to all relevant publicly available information on the proposed target company (e.g. its most recent publicly filed annual report and accounts), any material terms of the proposed Transaction (including the expected dilution effect on public shareholders from securities held by, or to be issued to, sponsors), and the proposed timeline for negotiations;
- an indication of how the SPAC has, or will, assess and value the identified target, including by reference to any selection and evaluation process for prospective target companies as set out in the SPAC’s original prospectus; and
- any other material details and information that the SPAC is aware of, or ought reasonably to be aware of, about the target and the proposed deal that an investor in the SPAC needs to make a properly informed decision.
- Supervisory approach
The FCA has clarified that SPACs will still be required to contact them once a Transaction has been agreed or information on a potential target company has been shared prior to the official announcement. During the communication with the FCA the Board of the SPAC shall confirm in writing that it has complied with all the requirements set out above and commit to ongoing compliance up to the completion of the Transaction.
In case a leakage of information occurs in relation to a potential Transaction, a suspension may be imposed for a short period of time until the sponsors can warrant that the requirements have been met and will continue to be met as stated above.
The SPACs may be requested to update the prospectus to inform when a potential company target has been identified. The FCA highlights that during the listing application process, they will not provide their views on whether or not a suspension will be required and disclosures should inform this fact. It is important to note that, if any changes to the SPAC structure occur following the listing authorisation without the suspension period, the SPAC can no longer benefit from the alternative approach proposed in CP 21/10.
In such a scenario, the FCA proposes that the SPAC notifies the regulator of such changes and request a suspension.
- Further investor protection or sustainability measures
The FCA welcome suggestions on other measures that could contribute to enhancing investors protection with respect to the SPAC regime. Moreover, the FCA also announced that it may consider making special changes for SPACs focusing on sustainability and investing based on environmental, social and governance factors, including a longer period to complete an acquisition or reduced threshold size.
To review the UK Listing Review please click here.
To review the CP21/10 please click here.
For more information, and any guidance or advice on SPACs and their listing process Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help
[1] Please see report on SPAC’s activity in 2020 and 2021
