On April 30, 2021, the FCA published a consultation setting out proposed investor protection measures for listed special purpose acquisition companies, or SPACs (Consultation). This follows on from recommendations made in the UK Listing Review (Hill Review) earlier this year. The Consultation is open for four weeks as the FCA wants to consult quickly in order to seek to introduce new measures by the summer, given the activity anticipated in the SPAC market.
The FCA also recognises that there may be merit in considering a separate listing category for SPACs in due course, which it intends to discuss in later publications on its review of primary markets and response to the Hill Review.
Why are these changes being proposed?
As discussed in our separate briefing SPACs: The London alternative, the SPAC market has been buoyant in the US during 2020 and early 2021 and has increasingly been a topic of discussion in the UK, albeit that the SPAC market here has remained relatively dormant to date.
A key deterrent for potential investors in UK SPACs identified in the Hill Review is the current Listing Rules presumption that trading in a SPAC’s shares should be suspended when an acquisition is announced. This raises a concern for investors that they will be unable sell their shares during the (potentially lengthy) period of suspension, even if they want to – for example, because they do not agree with the SPAC’s choice of acquisition target.
This requirement for a suspension differs from the rules in the US (and most other leading SPAC markets) where suspension is not required. In the Consultation, the FCA also notes that it potentially imposes a disproportionate barrier to listing for larger SPACs that build specific investor protections into their structures.
What are the key proposals?
It is proposed that SPACs which offer certain higher levels of investor protection should no longer be subject to the Listing Rules presumption that trading would be suspended when they announce an acquisition. SPACs that do not comply with these requirements at the time of IPO and thereafter would remain subject to the existing rules.
In order to fall within the new regime, a SPAC would need to meet the following criteria, some of which (as discussed in our separate briefing linked to above) are features of the current approach in the US.
Minimum size threshold on listing: The FCA has proposed a requirement for the IPO to raise aggregate gross proceeds of £200m (excluding any funds provided by the SPAC’s sponsors). In the FCA’s view, this is more likely to mean both that a high level of institutional investment is needed (with such investors performing diligence on the SPAC and its management, potentially leading to greater scrutiny of the investment proposition) and the involvement of an experienced management team and supporting advisers. A threshold of this type is not imposed in the US for SPACs that trade over-the-counter, although similar requirements are imposed by the major US stock exchanges and the FCA notes that it reflects consideration of both the UK experience of SPACs and analysis of SPAC IPO capital raisings in the US in the last 15 months.
Ring-fence money raised from public markets: This would result in the money raised from public shareholders being preserved to either fund an acquisition or be returned to investors (less any amounts agreed to be used for the SPAC’s running costs, which must be clearly disclosed to investors in the prospectus at the time of IPO). These requirements are intended to protect investors from misappropriation of the funds or excessive running costs being incurred. These proposals are in line with similar requirements in the US. They require binding arrangements to be put in place with an independent third party, although the FCA has not proposed a specific requirement for the establishment of a formal trust or escrow account, leaving a welcome degree of flexibility.
Time limit for making an acquisition: The FCA proposes a period of two years from IPO – if an acquisition has not been made at the end of this period, the ring-fenced proceeds should be returned to shareholders. A two-year maximum duration is in line with US market practice, although three years is permissible by stock exchange rules and some US SPACs provide for an automatic extension of either three or six months if a business combination has been agreed within the two-year period. The FCA recognises that there may be cases where the two-year deadline occurs when a target has been identified and announced but the acquisition has not yet closed. It is therefore also proposed that the SPAC should be given flexibility to extend its operations by up to an additional 12 months, subject to approval by its public shareholders.
Shareholder approval for any proposed acquisition:This would require a majority vote of public shareholders, with the SPAC’s sponsors not being able to participate, and sufficient disclosure of the terms of the acquisition. While a majority shareholder vote is typically required in the US, this is not always the case. Moreover, while market practice in certain jurisdictions is to prohibit sponsors from participating in the vote, this is not the case in the US. As a result, consideration should be given to whether excluding the sponsors from the vote is strictly required from an investor protection standpoint, particularly given that it will potentially make the SPAC a less attractive acquirer when compared to SPACs from the US.
Fair and reasonable statement: If any of the SPAC’s directors have a conflict of interest in relation to the target group, the SPAC would be required to publish a statement that the proposed transaction is fair and reasonable so far as the public shareholders of the SPAC are concerned. This statement would be given by the board, but should reflect advice by an appropriately qualified and independent adviser. While US SPACs are subject to majority independent director and similar governance requirements, the US regime looks to the applicable law of directors’ fiduciary duties in addition to general disclosure requirements rather than imposing a similar bright line requirement.
Redemption rights: The SPAC would need to give investors redemption rights allowing them to exit the SPAC before any acquisition is completed – this would be at a predetermined price which could be a fixed amount or a fixed pro rata share of the ring-fenced IPO proceeds less agreed running costs. The FCA notes that a redemption option, combined with a ring-fencing of proceeds and a time limit for identifying and making an acquisition, gives investors a means to exit their investment if they do not like the target or terms of the acquisition. This requirement is broadly in line with market practice in the United States, although under both the NYSE’s and Nasdaq’s rules, if a shareholder vote is held only shareholders who vote against the initial acquisition must be given redemption rights. If no shareholder vote is held, under the NYSE’s and Nasdaq’s rules all shareholders must be given redemption rights. In other words, although the FCA’s proposal is in line with US market practice, it goes beyond what is required in the US where shareholders are technically only required to be given the opportunity to vote for the proposed business combination or the opportunity to have their shares redeemed.
Adequate public disclosure to investors: This would be required at appropriate stages in the SPAC’s lifecycle – from listing though to any acquisition. It would include clear disclosure about the SPAC’s structure, strategy, and arrangements at IPO and the provision of sufficient information at the time of the initial acquisition announcement (including a positive obligation to update the market if new information becomes available prior to the shareholder vote). Whilst the disclosure proposed to be required at the time of acquisition is less extensive than the requirements that currently apply in order for a suspension to be avoided, SPACs would need to be mindful of their obligation to update the market to the extent new information becomes available prior to the shareholder vote.
Supervisory approach: In terms of its supervisory approach, the Consultation makes clear that a SPAC would still need to contact the FCA before announcing an acquisition and, in order to avoid a suspension, indicate to the FCA that it has met the relevant criteria from IPO and will continue to do so until completion of the acquisition. The FCA also notes that, where there is a leak, the presumption of suspension will still apply, although the suspension would be lifted if and once the issuer can demonstrate it meets the relevant criteria. The FCA stresses that (at the time of listing) it will not be providing any indication as to whether it is satisfied that a suspension at a future date will be unnecessary – this can only be agreed at the point the SPAC contacts the FCA about a potential acquisition.
Sustainability focused SPACs: The FCA notes that it is interested in considering whether the approach to SPACs could be differentiated for vehicles focused on sustainability and investing based on environmental, social and governance factors (although it does not explain why it considers investor protection concerns would be mitigated in such circumstances). Although the FCA is not proposing such provisions at this stage, it is very keen to receive feedback on whether it should explore this area further.
We expect that the proposed changes will be welcomed by the UK market. They would result in the removal of some of the features that currently distinguish the UK SPAC regime from those in other jurisdictions, notably the US. In particular, the proposed removal of the requirement for an automatic suspension on the announcement of an acquisition will put the UK on a much more even footing with other markets.
Whilst in some respects the changes could be seen as potentially reducing the flexibility of the UK SPAC structure for the SPAC and its sponsors (for example the requirement for shareholder approval of the acquisition and the need to offer redemption rights), they are intended to promote greater investor confidence in SPACs which will be key if they are to gain the same level of traction here as has been seen in the US. And, of course, it is proposed that the current regime will continue to be available for SPACs that do not meet the enhanced investor protection standards.
As we have noted previously, the ultimate impact of any rule changes remains to be seen, with another key factor likely to impact market activity in the UK no doubt being the extent to which recently launched UK SPACs ultimately translate into success stories and deliver expected returns for investors.
As with any investment vehicle, performance will invariably be driven in part by macro-economic factors beyond the control of sponsors and their newly-formed companies, but if history serves as any guide, SPACs will continue to be a feature of equity capital markets for some time to come.