The revised criteria allow UK-listed SPACs to avoid a suspension of their shares when announcing a de-SPAC deal.
By Nicola Higgs, David Berman, Chris Horton, James Inness, Rob Moulton, Anna Ngo, and Charlotte Collins
The UK, acting through the Financial Conduct Authority (FCA), will implement a new SPAC listing regime from 10 August 2021. This follows a consultation launched in April 2021 on the back of recommendations made by Lord Hill in his review of the UK listing regime.
The new regime removes the presumed suspension of a SPAC’s shares upon announcement of a de-SPAC until a prospectus on the enlarged group is published, which has been one of the main reasons that most recent SPAC activity in Europe has taken place on one of the Euronext exchanges, principally Amsterdam and Paris, rather than in London.
The new criteria that a SPAC has to meet to avoid a share trading suspension on announcement of the de-SPAC are the following:
- A minimum size threshold of £100 million raised when a SPAC’s shares are initially listed. The FCA reduced this from £200 million in response to consultation feedback stating that a lower threshold was more suitable for the European market and can still lead to a sizeable de-SPAC when a further issue of equity by the SPAC, known as a “PIPE”, is factored in.
- Monies raised are ring‑fenced (in an escrow or a trust account) to either fund an acquisition, or be returned to shareholders (in the event of investors redeeming shares or if a SPAC winds up), less any amounts specifically agreed to be used for a SPAC’s running costs.
- A set time limit to find and acquire a target within two years of listing, which may be extendable by 12 months subject to shareholder approval (i.e., a maximum operating period of three years). Following feedback, the FCA also introduced an option to extend the time limit by six months, which does not require a shareholder vote, in certain limited circumstances such as when a business combination agreement has been signed but not completed.
- Board approval of any proposed acquisition, excluding from the board discussion and vote any board member that is, or has an associate that is a director of the target or its subsidiaries, or has a conflict of interest in relation to the target or its subsidiaries.
- The board must publish a ‘fair and reasonable’ statement if any of the SPAC’s directors have a conflict of interest in relation to the target or any of its subsidiaries, which reflects advice from an appropriately qualified and independent adviser.
- Shareholder approval for any proposed acquisition, with SPAC founders, sponsors, and directors prevented from voting.
- A “redemption” option allowing investors to exit their shareholding before any acquisition is completed.
- Sufficient disclosures given to investors on key terms and risks from the SPAC IPO through to the announcement and conclusion of any acquisition. This relies heavily on compliance with existing disclosure requirements (such as in the Prospectus Regulation and Market Abuse Regulation (MAR)), with additional clarity on specific disclosures when and after a target is announced.
The FCA has also modified its supervisory approach to provide more comfort prior to admission to listing that an issuer is within the above guidance, rather than only at the point of an announcement. This change follows feedback that without such guidance up front there would still be a chance of shares being suspended by the FCA while the SPAC convinced the FCA that it meets the new criteria.
The criteria for a SPAC to fit within the new regime are widely applicable in the main SPAC listing venues in the US and in Europe, so should allow the UK to compete much more effectively for listings by SPACs; indeed we expect to see UK SPAC listings using the new regime during Q3 this year. However, rather than create a totally level playing field with the US and Europe, the UK regime does still have some specific differences that sponsors will need to weigh up:
- The sponsor and its directors will not be allowed to vote on the business combination, which is different to other markets.
- The FCA still requires a prospectus to be published in connection with a de-SPAC in order to list the enlarged group (so it is not possible to do what some SPACs have done on Euronext Amsterdam, namely list at IPO a large number of treasury shares which they can transfer out of treasury on a de-SPAC for use as PIPE shares or consideration shares without the need for a listing prospectus).
- Currently the FCA will not allow SPACs to list units (it will only list ordinary shares and warrants, using a standard listing); however the FCA continues to consider this aspect; it is possible to list units on Euronext and in the US.
- The business combination announcement must provide an indication of how the target has been, or will be, assessed and valued by the SPAC, with reference to any selection and evaluation process for prospective target companies set out in the prospectus published in relation to the admission to listing of the SPAC’s shares.
Against those factors, assuming London-listed SPACs raise money in British pound sterling, the SPAC sponsor will not have to negotiate with investors who have to bear the cost of the negative interest that applies to Euro deposits on most Euronext listings.
Overall this package of measures will allow London to compete more effectively with the Euronext exchanges and the US stock exchanges for SPAC listings and is a first concrete outcome from the recent Lord Hill review. The UK continues its post-Brexit regulatory reforming zeal in the public markets arena with other consultation papers recently published on reforming the UK prospectus regime and the effectiveness of the UK primary markets more widely. The proposed new prospectus liability regime for forward-looking information (which would include projections) is likely to be of particular interest to SPACs who often publish projections at the time of the de-SPAC in order to cleanse their PIPE investors from their pre-PIPE due diligence, so there may be further beneficial regulatory reforms for UK SPACs down the track.
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