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The UK Financial Conduct Authority is consulting on loosening the Listing Rules for Special Purpose Acquisition Companies (SPACs).
For any who have missed out on the #spacs hashtag as it reverberates around the financial services echo chamber, a SPAC is a company with no commercial operations that is formed strictly for the purpose of raising capital through an initial public offering (IPO) in order to acquire an existing company identified only after the IPO is completed. It is, in effect, an incorporated panel of investors and managers looking, first, for financial backing and then for a target investment. For this reason, a SPAC is sometimes referred to as a "search fund".
SPACs are currently proving popular in Asia and in the US. They have been seeing very considerable growth during the latter stages of the pandemic and particularly in recent months.
But some regulatory concern has arisen around investor protection issues. There are features of this run in SPACs which are reminiscent of the spate of Chinese reverse mergers in the early 2000s where Chinese businesses were keen to obtain access to the pool of US investment capital by buying listed shell companies. That ended badly for many (back at a time when RINO meant something other than "Republican in Name Only"), although it has since been suggested that the degree of negative publicity the practice received at the time was an overreaction.
Investors may have very little information to go on about the intended acquisition when a SPAC is brought to market. Much depends on the quality of due diligence done on the target company and, where that is inadequate, investors are exposed, first, to volatility and, later, to loss of their investment. These concerns have lead the UK authorities to take a more conservative approach than their US counterparts. The acquisition of the target company by a SPAC has hitherto triggered a "presumption of suspension" from listing at the moment when the news of the target company acquisition is released or leaked. Now, the FCA is seeking views about changing its approach.
The wider background to this move is the legacy of Brexit, the impact of the MiFID II Share Trading Obligation and Britain's new found zeal for global competitiveness. In November last year, as the end of the Brexit transition period approached, the UK Government commissioned a review of the Listing Rules by Jonathan Hill who last month submitted his report, recommending that the rebuttable presumption of suspension be scrapped and replaced with guidance on appropriate practices and procedures for SPACs:
To address what appears to be a barrier to the development of a potentially important source of equity financing and route to market for UK companies, including in particular in relation to technology-related companies, we recommend the FCA remove the rebuttable presumption of suspension and replace it with appropriate rules and guidance further to increase investor confidence in these companies – similarly to how commercial companies are treated.
This led the FCA to announce at the end of March that it would shortly be consulting on changes to the regime on SPACs. Less than a month later, the FCA says it has now "carefully analysed" trends in the US market and that it proposes to remove the presumption of suspension for SPACs that meet the following criteria:
a minimum of £200 million aggregate gross cash proceeds raised;
a two year time limit in the articles of association on the lifespan of the SPAC after admission to listing if no acquisition is completed, with the possibility of a one year extension;
provision for funds to be ring-fenced, so that monies raised from public markets are preserved either to fund the acquisition, or returned to shareholders (less any agreed running costs);
shareholder approval for any proposed acquisition, based on sufficient disclosure of key terms and a "fair and reasonable" statement where any conflict of interest exists between SPAC directors and a target company;
a "redemption" option allowing investors to exit the SPAC before any acquisition is completed; and
adequate disclosures to investors during the SPAC’s lifecycle, from initial listing to completion of the acquisition.
The headline constraints here are the minimum size requirement and the maturity cap for any SPACs which fail in their primary purpose. The former reflects the FCA's view that SPACs that can achieve a certain scale are more likely to have experienced management and advisors and to attract the kind of institutional investors that will ensure increased scrutiny of the investment proposition. The latter is an attempt to put a long-stop on the problem of uncertainty and unpredictability for investors. Both are, in essence, means of closing the information gap that is an intrinsic feature of SPACs and neither is likely to be particularly controversial. The new criteria will be adopted in the form of revised guidance on when the existing presumption of suspension may not apply to SPACs.
So what can we expect in terms of feedback to this consultation?
I believe we can say with confidence that the FCA's proposals will be popular with investors and issuers. UK market participants are still chafing at the recent loss of the City's share-trading crown to Amsterdam and concerned by the looming spectre of liquidity loss and market fragmentation. The FCA believes that, as a result of implementing these proposals:
SPACs’ capital could facilitate business growth in the real economy, bring new companies to list in the UK (whether from the UK or elsewhere), and increase activity and revenue opportunities for UK‑based financial and professional services firms
That's a powerful selling point.
And in the longer term? Well, it's probably equally safe to say that when the UK's post-Brexit regulatory ledger is published in due course, it will not be the FCA's vigilance on the size or longevity of SPACs that is held to account. With the wisdom of hindsight, the entire Dog of these proposals will be judged, I am certain, by the long Tail of "adequate disclosure".
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