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Until the last month, the market in the U.S. for special purpose acquisition company (“SPAC”) IPOs has been booming. For example, in the first three months of 2021, there were 298 IPOs of U.S. SPACs, which raised in aggregate $87.07 billion. That booming market has not included the UK, where during the same period, there were no SPAC IPOs.
U.S. and UK SPAC terms differ in 2 key respects:
Both of those differences were regarded as sufficiently investor-unfriendly that they are believed to have caused the relative dearth of SPAC IPOs in the UK.
On 30 April 2021, the Financial Conduct Authority (“FCA”) published a consultation paper on proposed investor protection measures for SPACs. This follows from Lord Hill’s earlier review of the UK Listing Rules, which we analysed in our earlier update.
SPACs are “cash shell” or “blank check” companies that raise funds through an IPO of a shell company, with the purpose of using that cash to acquire one or more businesses to be identified by the SPAC sponsors at some future point after the IPO. Shares in the SPAC are issued to the public through an IPO at a fixed price per share (generally $10). In the traditional SPAC IPO each share is typically issued with a detachable fractional warrant (e.g., a 1/3rd warrant), with each whole warrant separately tradeable and entitling the holder to purchase one share at $11.50. Sponsors are typically issued shares representing 20% of the post-IPO capitalization for a de minimis purchase price (typically $25,000 in the aggregate), and purchase additional warrants for cash in order to provide the SPAC with working capital and to pay underwriting fees and other offering expenses.
Although SPACs are not a new concept, they have exploded in popularity in the past year. Hundreds of SPACs have been listed in the U.S. since July of 2020 when Pershing Square raised the $4 billion Tontine Holdings Ltd., raising among them hundreds of billions of dollars to be put to work in searching out and acquiring targets.
Despite this dramatic increase in SPAC-raising, sponsors have steered clear of the London markets for these vehicles. The rules applicable to SPACs on the London Stock Exchange are considered inhospitable, among other reasons, because unlike the U.S. rules, the UK Listing Rules treat the transaction as a ‘reverse takeover’ and include a rebuttable presumption that a SPAC’s listing will be suspended by the FCA when an acquisition target is identified and announced. Although the presumption for suspension is rebuttable, it is rarely if ever actually rebutted, and historically London-listed SPACs have had listing suspensions of several months upon announcement of their business combinations. Investors are therefore trapped in a stock which has announced a very significant and material development, a problem which is exacerbated by the fact the UK rules (again, unlike the U.S.) do not currently require a shareholder vote on the acquisition or an option to elect the return of their cash instead.
In its consultation, the FCA has proposed that SPACs which meet certain higher investor protection levels will no longer be subject to the presumption in favour of listing suspension. Other SPACs will remain subject to the existing rules.
The new regime crucially provides for the removal of the trading suspension presumption in otherwise qualifying SPACs if they offer investors the right to redeem their shares prior to the initial business combination. These changes could result in SPACs becoming more popular in the UK
To fall within the new regime, a SPAC would need to meet the following criteria:
In addition to meeting these criteria, UK-listed SPACs will remain subject to the UK Market Abuse Regulation and the FCA Disclosure Guidance and Transparency Rules.
If implemented following consultation, the FCA’s newly proposed rules will bring UK practice in relation to SPACs much closer to the rules of the U.S., which is by a long way the leading listing venue for such vehicles, including a number of UK-founded and Europe-focused SPACs. In order for the UK to be competitive, hopefully the consultation will result in a balance being struck between appropriate shareholder control through voting and redemption rights whilst reducing execution risk and ensuring timetables do not risk becoming too protracted. We also hope the FCA will be prepared to permit greater certainty around the presumption being rebutted where the issuer confirms the criteria have been met on an ongoing basis rather than having to await its confirmation. The consultation on these proposals will last until 28 May 2021, with the aim to introduce the investor protection measures by summer 2021.