FCA Moves to Improve Access to SPACs

Dechert LLP

[co-author: Antony Vitanov]

Special Purpose Acquisition Companies, commonly known as ‘SPACs’ or ‘blank check companies’, have recently seen a huge uplift in investor appetite with little sign of this trend abating any time soon. Understandably, SPACs are gathering increased interest from regulators around the world as the current hotbed for the SPAC market, the U.S., continues to make headlines with record levels of capital raised. In contrast, the UK market has not seen anywhere near the same level of SPAC activity. However, with a recent push to update the UK Listing Rules, that may soon change. Following swiftly on from the Lord Hill Review’s recommendations (you can read our summary of the key recommendations here), the UK Financial Conduct Authority (the FCA) issued a statement last week indicating that it will be opening a consultation to consider the structural features and enhanced disclosure required to provide appropriate investor protection in SPACs. The consultation is set to consider the necessary changes to the UK Listing Rules to create an attractive market environment for these vehicles and their investors, including a change to the minimum capitalization and redemption options for investors. With the incorporation of these protections, the FCA has indicated that the existing presumption of suspension of the listing for such companies at the point of an announcement of an acquisition or merger target, which is considered to be one of the main barriers to SPACs listing in London, would no longer be required.

In this OnPoint, we cover current SPAC-market trends, the key reasons behind the UK being less attractive as a market for SPAC listings and how the proposed listing rule changes might make the listing environment more suited to SPAC listings and transactions.

What are SPACs and what does the market for these vehicles currently look like?

As a reminder, a SPAC is a company organized by a sponsor with operating and/or investing experience, which raises capital via an IPO and by listing on a stock exchange. After the SPAC is listed, the funds raised are held in an escrow account and are used to acquire or merge with an appropriate target operating company within a specified time period, usually between 18-24 months.

According to data from Refinitiv, as of March 29, 2021 there have been 10 SPAC listings in Europe in 2020 and 2021, raising in aggregate approximately US$1.3 billion. In comparison, there have been 522 listings in the U.S. with over US$300 billion of capital raised during the same period. With the funds raised by SPACs in Q1 2021 already surpassing the capital raised in the whole of 2020, markets and regulators across the world have been rushing to make changes to their respective listing rules in the hope of attracting SPAC listings. Prominent examples include: London, which is weighing up changes to its listing rules; at the end of March 2021, Singapore opened a consultation to amend its listing rules to allow SPACs to be listed on its Mainboard; and Nasdaq amended its Stockholm Nordic Main Market Rulebook as of February 1, 2021 in order to attract SPAC listings.

Why is the UK market currently less attractive for SPACs and their investors?

One of the main reasons why the UK regime is currently considered less attractive for SPAC listings is the presumption that trading in a SPAC’s shares should be suspended upon announcing a potential acquisition or merger target. This has two key consequences: (1) one of the key benefits for an operating company to be acquired by or merge with a SPAC, namely, a less burdensome listing process, is lost because the suspension essentially means that the operating company still needs to prepare a full listing prospectus and deal with the prospectus rule restrictions in relation to providing forward-looking statements; and (2) the SPAC investors are locked in and cannot trade out, whether or not they approve of the proposed deal.

The combined result of these issues is that nascent companies that may be looking for a SPAC acquisition or merger, which are traditionally the most common targets for SPAC deals, are still faced with dealing with the traditional hurdles of producing a full prospectus and meeting free-float requirements among other requirements, while the investors backing the SPAC have little protection from being dragged into a bad deal.

What is being proposed and why would that make the UK more attractive for SPAC listings?

In order to deal with these challenges, and in light of the Lord Hill Review recommendations, we expect the FCA’s consultation and subsequent listing rule changes will aim to align the UK Listing Rules to the SPAC rules of other markets. It is likely that the proposals will include:

  1. Introducing more effective investor protections such as a requirement for shareholder votes on whether potential acquisitions or mergers should go through, redemption rights for investors prior to completion of an acquisition or merger by the SPAC, as well as enhanced information requirements on target companies. This would give SPAC investors more confidence, control of their shares and greater liquidity by allowing them to approve or reject a proposed deal, and the ability to redeem their shares if they are not happy with the relevant deal;
  2. Changes to the free float requirement (meaning the proportion of a company’s shares in public hands, freely available for trading) by lowering the requirement from 25 percent to 15 percent, changing the definition of free float to more accurately reflect liquidity of shares, and allowing companies to use other measures to demonstrate liquidity. This would allow newer and perhaps smaller companies to raise capital, while also allowing founders to retain greater control of the business and its direction, instead of ceding too much control, too early, which is traditionally perceived as a disadvantage to listing; and
  3. Removing the presumption of suspension of a SPAC’s shares (subject to a minimum size criterion) on the announcement of an acquisition or merger target, which would deal with the current issue of investors not being able to trade out of deals they do not approve of.

Our thoughts

We expect that the FCA’s consultation (following on so swiftly from Lord Hill’s review recommendations) will be welcomed by the market, which will be encouraged by the FCA’s stated aims of introducing these new listing rules and guidance as early as summer 2021. The FCA clearly intends to move fast to introduce new rules and hopefully further consultations on other Lord Hill recommendations will begin shortly. It remains to be seen however whether the potential changes to the regulatory treatment of SPACs will in themselves lead to the increased institutional investor interest required for the London SPAC market to gather material momentum.

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