The UK SPAC Reform: Preliminary Remarks

Special Purpose Acquisition Companies (SPACs) found new life a few years ago and took the initial public offering (IPO) market by storm in 2020, raising a stunning $83 billion in capital. The momentum carried over into 2021, with $115.6 billion raised via more than 400 SPACs in 2021, mainly on Wall Street, where SPACs make up two-thirds of all IPOs.

SPACs are cash-shell companies with no operations set up with a particular purpose: to conduct a business combination or reverse merger with a target. The capital is raised via an IPO of shares and warrants (or unit securities composed of both), and then the SPAC uses the proceeds to fund one or more mergers that form the basis of the ongoing public entity.

Since April – May 2021, SPAC offerings in the US have significantly slowed as regulatory, and valuation concerns have increased. This is not surprising because the opinions on SPACs generally tend to be extreme. On the pro-side: SPACs are speedier and provide more certainty when the target is identified because the public investment has already been made. On the other hand, those who invest in the SPAC initially have less confidence about the nature of the ultimate target. Moreover, the sponsor and associates are commonly allocated shares and warrants in the SPAC for a nominal consideration, in recognition of their efforts at identifying suitable targets, but this may significantly dilute other shareholders of the SPAC.

For those reasons, the international financial regulation of SPACs is evolving, and it tends progressively to be more focused on retail public investors. This shows a new political side of SPACs in determining the outcome of future outflows and inflows of capital between countries. Furthermore, it gives rise to competition between national regulatory frameworks to ensure that the magnetism of capital inflows correlates with the most SPAC-friendly legal regime. The UK aims to position itself as the new HQ for European SPACs.

1. The Hill Report and the UK SPAC Reform: the Background

On 3 March 2021, Lord Jonathan Hill's review of the UK's listing regime recommended a series of reforms to make the UK a more attractive venue for initial public offerings (IPOs) post-Brexit.

Under the current UK legal regime, there is a presumption that a SPAC has to suspend the trading of shares once a target is announced because of reverse takeover rules. Hence, investors are locked in, even if they do not approve a potential purchase – not really offering investors protection. The Hill Report called for the removal of this presumption. It introduced new safeguards, such as the right of SPAC shareholders to vote on the acquisition and the right to redeem their initial investment before completing the business combination.

Furthermore, the Hill Report suggested the introduction of dual-class share structures even for premium listings. These allow SPAC founders to retain control through securities that carries more than one vote. However, this proposal has been taken forward by the FCA separately from the SPAC reforms.

On 30 April 2021, the FCA issued a consultation paper (CP21/10) and a policy statement (PS21/10) on 27 July 2021, setting the final version of changes to the UK Listing Rules applicable SPACs. The revised changes came into force on 10 August 2021.

2. The UK SPAC Reform: Analysis

To avoid the presumption of suspension under the new rules a SPAC must meet the following conditions:

• Raise at least £100 million from public investors. This is a more reasonable target than the original Consultation Paper proposal of £200 million.
• Ring-fence money is raised from public investors with an appropriate third party to ensure the funds are used only to fund an approved acquisition or to meet specified running costs of the SPAC.
• Allow shareholders to redeem shares at a pre-determined price before the completion of the business combination.
• Obtain approval by the board of the SPAC of the acquisition, conflicted directors being excluded from the discussions and vote.
• Obtain shareholder approval of the acquisition, the founder and associates being excluded from voting.
• Grant two years to complete an acquisition (three years if shareholders approve a twelve-month extension) with an extension of six months in the event a transaction is well advanced.
• Disclose key terms and risk factors at the point of the SPAC IPO and make further disclosures about the target and the time of the acquisition announcement and after that as the acquisition proceeds. 

SPACs that do not meet such listing requirements can still be listed, although the presumption of suspension will apply to them. Smaller SPACs or better micro-SPACs may prefer more flexible listing venues in Europe such as Euronext—Borsa Italiana S.p.A. in Milan that since 3 August 2021 requires its Alternative Investment Market (AIM) a threshold of only €10 million. However, the FCA took the view that a minimum size of £100m was necessary to attract significant investment by institutions, whose monitoring would, in turn, operate as a mechanism for investor protection.

In a nutshell, our main insights on the UK SPAC reform can be summarised as follow:

• The FCA has, generally, taken a flexible approach to SPACs, although policy statements are cautious and highlight the complexity of SPAC structures.
• Larger SPACs are favoured, and this shows the need for sponsor's credibility.
• The UK has distanced itself from the current established international financial frameworks of SPACs, especially regarding the voting rights of the sponsor shareholders and anchor investors.

In terms of disclosures, the FCA position is similarity to the recent ESMA public statement published on 15 July 2021. The FCA is seeking to promote uniform prospectus disclosure and protect investors in SPACs. In other words, SPAC's sponsors shall inform investors of future scenarios (such as possible dilution, post-acquisition governance and disclosure of the sponsor's compensation scheme; future funding needs either in the form of PIPE or convertible bonds). However, this information cannot be known at the time of the IPO. Hence, the FCA and European regulators should take a pragmatic approach and accept that pre-IPO disclosures are possibly illustrative rather than definitive because most of those features are negotiated at the business combination and might differ from those initially proposed in the prospectus.

The new rules in the UK prevent sponsors and anchor investors who participate in a SPAC's at-risk capital from voting on the acquisition. This is a significant difference from other listing venues, and we believe it may impact London's ability to compete in the SPAC market. Indeed, this is not required by other Exchanges such as NYSE, NASDAQ, and Euronext.

Apart from these potential hurdles, the overall SPAC reform in the UK seems to be consistent with the international trend of guaranteeing more public investors' protections in SPAC deals, and it represents the first harmonised regime on SPACs in Europe. Whether the UK is likely to become the next 'SPAC-hub' in Europe depends on whether the FCA will have a flexible approach and market-oriented mind in examining and approving future SPAC prospectuses and business combinations.

Daniele D'Alvia is an Associate Research Fellow at IALS.

Paul Davies is a Senior Research Fellow at Harris Manchester College, University of Oxford.

Ferdinand Mason is a Partner at White & Case – London.

Milos Vulanovic is Associate Professor of Corporate Finance at EDHEC Business School.