UK listing review: reforms proposed to SPAC regime

The consultation follows on from Lord Hill’s review of the UK listing regime, which made a number of recommendations designed to modernise the UK markets and attract a greater number of high-growth companies to list in London. It is open until 28 May 2021, with any changes potentially being implemented shortly thereafter.

SPACs have become an increasingly popular method of corporate acquisition, particularly in the US. The FCA hopes that a liberalisation of the rules around the listing of SPACs in the UK might bridge the gap with the US and encourage more SPACs to consider London as a potential listing venue. However, the FCA will need to move fast if it is seeking to attract any of the current wave of SPACs to list in London.

The current SPAC regime

A SPAC is a company formed to raise money from investors which it then uses to acquire an operating business. SPACs are founded by a management team, known as a founder or sponsor; and are listed on a stock exchange through an initial public offering (IPO). Upon IPO, the SPAC will have no tangible assets or business operations. Investors in the SPAC are therefore investing in the ability of the sponsor to find an appropriate target to acquire.

The sole purpose of a SPAC is to identify and purchase a business that is consistent with its investment objectives. It may have specific investment criteria, or may be sector agnostic. The subsequent acquisition of a target company is commonly referred to as a ‘de-SPAC’ transaction, and is treated as a ‘reverse takeover’ under the existing listing rules. Once the acquisition is complete, the target company will have gained a public listing without having undergone its own IPO process.

There is currently a rebuttable presumption in the listing rules that a SPAC’s shares will be suspended from trading once it announces a potential 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 accurately assess its financial position and inform the market accordingly. As a result of the suspension, investors in the SPAC are unable to sell their shares and realise their investment until the acquisition is complete and a prospectus is published. Investors in the SPAC are therefore ‘locked in’ to their investment for an uncertain period of time, unable to redeem their shares until completion of the business combination.

In the FCA’s view, this represents a disproportionate barrier to listing in the UK for SPACs, particularly when compared to the US. US SPACs are able to build specific investor protections into their structures, such as allowing shareholders to vote on the acquisition prior to completion and allowing redemption of their initial investment.

There has been a marked difference in the US and UK SPAC market over the last 15 months. US SPAC activity has been buoyant, with a historic number of SPAC vehicles listed: 248 in 2020, raising approximately $83 billion; plus 313 SPAC vehicles, raising approximately $102bn, in the first three months of 2021 alone. By comparison, only seven SPACs were listed on the main market or AIM in the UK during the course of 2020, raising approximately $46 million; and only three in the first three months of 2021, raising approximately $343m.

The proposed reforms

Under the proposed reforms, the FCA will generally be satisfied that the SPAC has sufficient measures in place to protect investors and to ensure the smooth operation of the market, provided that the SPAC can meet certain conditions. No suspension will be necessary in these circumstances.

The conditions proposed by the FCA in its consultation paper are:

Size

The SPAC must raise aggregate gross proceeds of at least £200m from ‘public shareholders’ on IPO. ‘Public shareholders’ excludes any directors, founders or anyone promoting the SPAC, so funds provided by sponsors would not count towards the £200m threshold.

Ring-fencing

The proceeds raised by the SPAC would need to be ring-fenced via an independent third party pending completion of the acquisition or return of capital to the SPAC’s public shareholders if the SPAC fails to make an acquisition. Practically speaking, this may mean that the SPAC would be required to enter a form of escrow, trust or similar ring-fencing arrangement. The SPAC may only reduce the ring-fenced proceeds by a specified amount to fund its operations, such amount having been clearly disclosed in the SPAC’s IPO prospectus.

Time limit

The SPAC’s constitution would need to impose a time limit of two year from initial listing for the SPAC to make an acquisition. This time limit would also need to be clearly set out in the SPAC’s IPO prospectus. The SPAC would be able to extend this time frame by one year, to an aggregate period of three years, with the approval of its public shareholders. If no acquisition is made within the time limit, the SPAC’s funds would be returned to its shareholders.

Board approval

The SPAC’s board would need to approve any proposed acquisition. Any directors connected with the acquisition target or who have a “conflict of interest in relation to the target” would be excluded from voting for the purpose of board approval.

Shareholder approval

The SPAC would need to provide its shareholders with the right to vote on a proposed acquisition. The founders, sponsors and their affiliates would be excluded from voting. The SPAC would also be required to disclose to shareholders sufficient information on the proposed transaction for them to make a properly informed decision when voting, typically in the form of a shareholder circular.

‘Fair and reasonable’

Where any of the SPAC’s directors have a conflict of interest in relation to the acquisition target, the board of the SPAC would be required to publish a statement that the proposed acquisition is fair and reasonable as far as public shareholders are concerned. The statement should reflect advice by an appropriately qualified independent adviser, although the fairness opinion itself would not need to be published.

Redemption option

The SPAC must provide an option for shareholders to redeem their shares at a pre-determined price in order to give them a means of exiting their shareholding. This right of redemption would apply whether or not they approve of the acquisition target or the final terms of the proposed acquisition. The terms of the redemption option would need to be detailed in the SPAC’s IPO prospectus.

Announcement obligations

When announcing a proposed acquisition, the SPAC must disclose details of the target’s business; links to all relevant publicly available information on the proposed acquisition, including any expected dilution of public shareholders; and the proposed timeline for negotiations. It would also need to disclose how it has assessed and valued the target, as well as any other material details and information which investors need to make an informed decision. The SPAC would also be under an obligation to keep this information up to date.

A SPAC that wishes to take advantage of the new conditions will still need to approach the FCA before announcing an acquisition. It is only at this point that the FCA will determine if the SPAC meets the relevant conditions and, if so, agree that a suspension of its listing is not required.

The changes do not affect other aspects of the rules that would apply in relation to the acquisition – for example, the relevant listing rules around reverse takeovers and the obligations under the UK Market Abuse Regulation. In addition, if the SPAC wishes to upgrade from a standard to a premium listing at the same time as completing the acquisition, it will need to satisfy the eligibility requirements for a premium listing.

Even if the SPAC has satisfied the relevant conditions, the FCA would retain a general power to suspend trading of its shares if it has other concerns about the smooth operation of the market.

Potential impact

Historically, one of the crucial factors for listing successful SPACs has been the identity of the relevant founder or sponsor team, their experience and their ability to attract investors or garner an investor following. There are numerous examples of founders or sponsor teams which have such a following, and who have gone on to subsequently list multiple SPACs. The proposed requirement of a £200m minimum raise from individuals not connected to the founder or sponsor will inevitably seek to reinforce this dynamic, and the need for the relevant founder or sponsor to have a reliable number of interested investors from the outset.

In addition, the threshold requirement will make smaller SPACs – those seeking to raise less than £200m – unviable, something which would have been a stumbling block for the SPACs which have listed on the UK main market over the past 15 months.

The FCA has said that SPACs are “likely to remain a modest feature of UK markets”. It remains to be seen whether the proposed reforms, if introduced as drafted, will generate the same level of interest as seen on the other side of the Atlantic.

Co-written by Amy Moore of Pinsent Masons