The SPAC proposition
SPACs are a relatively straightforward concept, involving the establishment of a new company by a team of experienced promoters with the objective of raising equity finance in conjunction with a stock market listing, and then deploying these funds to acquire a suitable business. A SPAC has no business or assets other than the cash raised, which must be used within a limited timeframe to make a substantial acquisition (called a ‘de-SPAC’). If a suitable target is not identified, the SPAC must be wound up and the funds returned to investors.
At the heart of the structure’s appeal is the speed and certainty it offers for a target seeking an IPO, in comparison to a traditional flotation. With the funds already raised, management can avoid the lengthy timescales and uncertainty involved in a traditional IPO and accompanying investor roadshow, and limit the negotiations on price to a smaller group of stakeholders.
The new UK rules and guidelines
Under the new rules and guidelines, the FCA will disapply the presumption of suspension if a SPAC has the following features:
- A minimum size threshold of £100 million raised from external investors on the SPAC’s IPO. The FCA has reduced this from the £200 million figure on which it originally consulted, in response to feedback.
- The funds raised at IPO are ring‑fenced either to finance an acquisition, or for return to shareholders (in the event of investors redeeming their shares or if the SPAC is wound up), less any amounts specifically agreed to be used for the SPAC’s running costs.
- A time limit is set to find and acquire a target within two years of the SPAC’s IPO, extendable by 12 months with shareholder approval. The FCA has also introduced an option to extend the time limit by six months without shareholder approval, in certain limited circumstances (broadly, if the acquisition has been already agreed and/or the shareholder meeting to approve the acquisition announced).
- The board’s approval of the proposed acquisition must exclude 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 publishes a ‘fair and reasonable’ statement if any of the SPAC’s directors has a conflict of interest in relation to the target or any of its subsidiaries, which reflects advice from an appropriately qualified and independent adviser.
- The SPAC requires shareholder approval for any proposed acquisition, with SPAC founders, sponsors and directors prevented from voting.
- The SPAC provides a ‘redemption’ option allowing investors to exit their shareholding before any acquisition is completed.
- The SPAC gives investors sufficient disclosures on key terms and risks from the SPAC IPO through to the announcement and conclusion of the acquisition. This relies heavily on compliance with existing disclosure requirements (such as in the Prospectus Regulation and Market Abuse Regulation), with additional clarity on specific disclosures when and after a target is announced.
This last point is key to avoiding a suspension. Assuming that the admission criteria listed above are met by the SPAC at IPO (and continue to be met, which must be confirmed to the FCA), to avoid suspension, the SPAC will still need to ensure it can comply with its ongoing obligation to announce inside information under the Market Abuse Regulation and that it provides the market with full information about the target and the terms of the transaction as soon as possible once the acquisition is announced. The new rules specifically require a description of the target’s business and links to publicly available information, how it has been valued, the transaction terms and timetable, the dilutive effect on existing investors and any other material information that investors need to make a properly informed decision. While information can be omitted from the announcement if it is not immediately known, a significant information gap may nevertheless encourage the FCA to consider a temporary suspension if the smooth operation of the market in the SPAC’s shares is jeopardised as a result. Inevitably, the likelihood of this will be increased if there is a leak at a time when the parties are not in a position to make the requisite disclosures.
It should be noted that a SPAC will still be able to seek a listing on the Official List without complying with the above criteria; however, the presumption of suspension will apply once it identifies an acquisition target.
The new rules and guidelines take effect from 10 August 2021.
The FCA is putting in place these changes at a time when it is also consulting on other changes designed to modernise its Listing Rules, including: allowing a targeted form of dual class share structure within the premium listing segment of the Official List to encourage innovative, founder-led companies onto public markets sooner; reducing the amount of shares a company is required to have in public hands (the so-called ‘free float’) from 25 per cent to 10 per cent; and increasing the minimum market capitalisation threshold for shares in ordinary commercial companies from £700,000 to £50 million. These changes are expected to be in place before the end of the year.
Client Alert 2021-208