The proposed changes follow on from Lord Hill’s review of the UK listing regime and the commonly held view that the approach to suspension has been a deterrent to SPACs choosing to list in London. The consultation paper is the first of a number to be published by the FCA following the Hill review.
The FCA’s proposals are most probably an interim measure, with further SPAC-related measures likely to be included in a more wide-ranging review of the Listing Rules later in the year, potentially including a new separate listing category for SPACs.
The proposals are relevant only to SPACs that are listed on the Main Market, and the rules applicable to AIM-traded SPACs are unchanged.
Under the proposals, the FCA would not suspend the listing of a SPAC on announcement of an acquisition if the SPAC satisfies each of the following criteria (including, where relevant, by inclusion of the relevant terms in its constitutional documents):
- The SPAC raises minimum gross proceeds from its IPO of £200 million (excluding founder capital);
- The proceeds of the IPO (less a pre-determined amount in respect of the running costs of the SPAC) are ring-fenced (by being placed with an independent third party) so that they can be returned to investors if the SPAC does not make an acquisition or shareholders choose to redeem their securities;
- The SPAC makes an acquisition within 2 years of its IPO, extendable by an additional 12 months by independent shareholder approval (excluding founders and sponsors);
- The proposed acquisition must be approved by the SPAC’s board of directors (excluding any directors connected with the proposed target) and its independent shareholders;
- If any SPAC director has a conflict of interest in respect of the target, the SPAC’s board of directors must publish a statement that a proposed acquisition is fair and reasonable to its independent shareholders, which must reflect advice from an independent adviser;
- Investors must be permitted to redeem their securities before a SPAC completes an acquisition, whether or not they have voted in favour of the acquisition;
- The initial announcement by a SPAC of a potential acquisition must include a description of the target’s business, links to all publicly available information on the target (including financial statements), the material terms of the proposed transaction and the proposed timeline for negotiation of the transaction, an indication of how the SPAC has assessed and valued the target and any other material details that the SPAC is, or ought reasonably to be aware of, about the target and the proposed transaction that an investor needs to make a properly informed decision.
The FCA will continue to suspend the securities of any SPAC which does not meet these criteria (and which is not able otherwise to provide detailed information regarding the target at the time of initial announcement of the proposed transaction) and will – at least temporarily – suspend the securities of any SPAC if information regarding a proposed transaction leaks.
A SPAC which meets the criteria must also consult with the FCA in advance of any initial announcement regarding an acquisition and provide the FCA with confirmation from its board of directors that the SPAC satisfies the relevant conditions and will continue to do so until the “de-SPACing” transaction is completed.
The FCA states that it will not confirm to a SPAC at the time of its IPO that it meets the relevant criteria and the SPAC’s prospectus and other disclosures must reflect this point.
Further, even if the SPAC avoids suspension on the initial announcement, it must still apply for re-listing (including satisfying relevant eligibility criteria and being required to produce a prospectus) on completion of the de-SPACing, on the basis of the reverse takeover requirements in the Listing Rules.
The FCA’s rationale
The FCA acknowledges that the present system of suspension of a SPAC’s securities pending completion of a de-SPACing transaction is not necessarily the optimal means of protecting shareholders. The FCA had already removed the rebuttable presumption of suspension for operating companies in 2017, on the basis that on-going disclosure obligations ought already to provide investors with sufficient protection.
The FCA is also concerned about the speculative nature of SPACs and the consultation paper includes numerous cautionary references to investing in SPACs. This is the reason for the proposed £200 million minimum size, which the FCA states should attract institutional investors and sophisticated founders, management and advisers, thereby applying increased scrutiny to any de-SPACing and, presumably, to avoid the concerns that the FCA has about small and narrowly held listed cash shells. The FCA indicates that it may in the future relax its requirements for SPACs focussed on sustainability and investing based on ESG criteria.
Otherwise, the FCA has largely looked to regulation and market practice in the US and other European markets for the other elements of the proposals. The main remaining difference is the approach to cancellation of listing on completion of a reverse takeover and the requirement for a UK listed de-SPACed entity to reapply for listing – while other jurisdictions generally require the publication of detailed disclosure on the post-acquisition entity, unlike the UK, cancellation of listing pending satisfaction of eligibility criteria is not necessarily a given.
Some elements of the FCA’s proposals may still lead SPACs to list elsewhere, for instance, the FCA’s reticence to agree in advance that a SPAC will qualify to avoid suspension, or may present some technical challenges, for instance, for SPACs that are UK public companies being able to satisfy the redemption obligations absent sufficient distributable profits or a reduction of capital.
Further clarity would be useful regarding what would constitute a conflict of interest in respect of the obligation to provide a fair and reasonable confirmation, especially given the cost that may be involved in obtaining the supporting independent advice (and which presumably would have to be met by the SPAC from its own resources).
The consultation does not address other concerns of SPACs listing in Europe, including the potential treatment of a SPAC as an alternative investment fund (AIF) for the purposes of the Alternative Investment Fund Managers Directive (although the UK approach is that SPACs are not AIFs) or the challenges presented by the listing of SPAC common share and warrant “units” and the subsequent splitting of the units.
Conscious that it may need to move fast if any of the current wave of SPACs are to be attracted to list in London, the FCA’s consultation is open to 28 May 2021, with any changes potentially being implemented shortly thereafter.
If you have any queries on the proposals or would like to explore a listing on the London capital markets, please speak to your usual contact at Hogan Lovells or one of the listed contacts.
Authored by Jonathan Baird.