The FCA has published its anticipated consultation paper on its proposed changes to the Listing Rules in relation to special purpose acquisition companies (SPACs). The proposals set out the framework for a more flexible regime for larger SPACs that provide strong investor protections. Subject to the consultation process, the FCA aims to introduce the proposed changes by the summer.
Currently under the Listing Rules there is a rebuttable presumption that a SPAC will be suspended from listing when it announces its target acquisition. The basis for this presumption is that there will generally be insufficient publicly available information about the proposed transaction and the SPAC will be unable to assess accurately its financial position and inform the market accordingly. A consequence is that while a SPAC is suspended, investors in the SPAC are unable to realise their investment.
There are currently relatively few SPACs listed in London. The FCA consultation paper mentions 20 live UK-listed SPACs and 13 with a suspended listing, with a substantial majority of all the SPACs having a market capitalisation of £5 million or less.
The UK Listing Review noted that responses to its Call for Evidence suggested that "... while there may be several reasons why UK SPAC financing has not emerged at scale, a key factor is regulatory and relates to FCA rules which can require trading in a SPAC to be suspended when it announces an intended acquisition".
Other jurisdictions, notably the US, have recently seen evolution and significant growth in this sector, with larger-scale SPACs, supported by experienced management and with investor protections built into their structures. The UK Listing Review therefore recommended that the FCA consider changing the current UK listing regime to align it more closely with standards in other international markets and encourage the potential for similar development in the UK market.
Conditions for avoiding suspension
Core to the FCA's proposed changes to the Listing Rules is a new set of guidance conditions. Where a SPAC meets these, the FCA will generally be satisfied that the SPAC has in place sufficient measures to protect investors and the smooth operation of the market, and the suspension will not apply.
For a SPAC not meeting these conditions, the existing Listing Rules guidance setting the rebuttable presumption of suspension will continue to apply.
The proposed conditions that a SPAC will have to satisfy to avoid the suspension presumption are as follows.
Size threshold: At the date of its admission to listing, the aggregate gross cash proceeds received by the SPAC for the shares it issued to public shareholders must have been at least £200 million. A public shareholder is a shareholder who is not a founder, director or someone who promotes or supports the SPAC operationally. A SPAC's ability to raise material sums from public shareholders at inception is more likely to mean (i) a high level of institutional investment and therefore potential greater scrutiny of the investment proposition and (ii) an experienced management team and supporting advisers.
Ring‐fenced cash for acquisition, redemption or repayment purposes: In order to protect investors from misappropriation or excessive running costs, the SPAC must adequately ring-fence, via an independent third party, proceeds raised from public shareholders to ensure that those proceeds can only be used:
- to fund an acquisition approved by the board and by its public shareholders;
- to redeem or purchase its shares from its public shareholders;
- for distribution to its public shareholders if the SPAC fails to complete an acquisition within the relevant time limit; or
- to return capital to its public shareholders on a winding-up.
The SPAC may reduce the ring-fenced proceeds by a specified amount to fund its operations, where that amount has been clearly disclosed in the prospectus published in relation to the admission to listing of the SPAC's shares.
Time limit for making an acquisition: In order to focus management and avoid undue uncertainty, a SPAC must find and acquire a target within two years of admission to listing. This time limit must be set out in its articles of association (or equivalent constitutional document) and also referenced in the SPAC's prospectus. To provide some flexibility, the SPAC will be able to extend its operations by up to 12 months, subject to approval by its public shareholders.
Board and shareholder approval of a transaction: A SPAC's articles (or equivalent) will need to provide for board approval of any proposed transaction, excluding from the board discussion and vote any board member who is conflicted (e.g. because they are a director of the target or a subsidiary of the target). The articles will also need to provide for the SPAC's public shareholders to approve the proposed transaction.
Fair and reasonable statement on the terms of an acquisition: Where any of the SPAC's directors has a conflict of interest, the board of the SPAC will have to publish, in advance of the shareholder vote, a statement that the proposed transaction is fair and reasonable as far as the public shareholders of the company are concerned and that the directors have been so advised by an appropriately qualified and independent adviser.
Redemption option for shareholders: Investors in the SPAC will have the right to require the SPAC to redeem or otherwise purchase their shares for a pre-determined amount, exercisable at the discretion of the investor before completion of a proposed acquisition.
Disclosure: To protect investors and ensure the smooth operation of the market, there will be disclosure requirements additional to those that apply to listed companies generally. This disclosure regime will include:
- the disclosure of the various matters described above (other than the size threshold) in the SPAC's prospectus on admission to listing;
- a requirement to make an RIS announcement with prescribed information about a proposed acquisition. The information will include, for example, the material terms, the proposed timetable, links to relevant publicly available information on the target and an indication of how the target has been, or will be, assessed and valued by the SPAC. Any prescribed information that is not known at the time of the announcement must be identified and then disclosed as soon as it is known (and in any event before the shareholder vote).
Proposed supervisory approach
A SPAC that wishes to take advantage of these new criteria will still need to approach the FCA before announcing an acquisition. It is only at that point that the FCA will, if the SPAC meets the criteria, be able to agree that a suspension is not required, notwithstanding that, as described above, the SPAC will have had to meet some of the criteria when it listed.
To satisfy the FCA that it meets the criteria, the SPAC will need to provide a board confirmation that it has met the criteria from the point of listing and that it will continue to do so until the completion of the proposed acquisition. A SPAC that ceases to meet the criteria after it has given a confirmation will have to request a suspension.
Irrespective of whether or not the SPAC has met, and continues to meet, the conditions required in order not to presume a suspension on announcement of the acquisition (and there are no other circumstances which suggest suspension), the SPAC will continue to be subject to a cancellation of its listing pending re-admission upon completion. In these circumstances, the existing rules apply - and it is within the discretion of the SPAC to correctly coincide completion with re-admission to avoid any period during which the shares in the SPAC are not traded.
The consultation closes on 28 May 2021 and, as already mentioned, the FCA proposes to introduce the new measures by the summer. It will consider further whether the changes proposed, which are primarily in the form of guidance, should in the future be codified as a more specific set of rules for SPACs.