New rules introduced on August 10 seek to attract more special purpose acquisition companies to the UK market.
It was inevitable that the Financial Conduct Authority (FCA) would reform its regime to try to help the UK catch some of the billions of dollars being generated by the burgeoning special purpose acquisition companies (SPACs) market. The rules that it devised, which came into effect on August 10, do not come as a great surprise: the FCA wants to incentivise SPACs to come to London instead of other, traditionally more SPAC-friendly, jurisdictions.
SPACs involve money being raised from investors who are told that the purpose is to merge with a private company. At present, almost half of the money raised around the world for new listings is being poured into SPACs, as it can bring swifter returns for investors than more conventional company acquisitions.
One great advantage for banks is that the FCA’s changes do not exclude them from advising on a SPAC’s listing
Under a traditional initial public offering (IPO), a company is audited, files a registration statement with the appropriate exchange commission, and arrangements are made to list its shares on a stock exchange. A SPAC, however, is created by a team of investors in order to acquire another company. Once incorporated, the SPAC undertakes an IPO and its shares are listed on a public stock exchange. A SPAC has no commercial operations and no assets other than the money it raises through the IPO, which is placed in an account until those running it identify a private company to be acquired.
The finalised rules
In announcing its proposed rule changes on April 30, the FCA said that it required additional safeguards for investors in SPACs. These proposed safeguards included allowing investors to exit a SPAC before any acquisition was completed, ensuring money raised from public shareholders was ring-fenced, shareholder approval being required for any proposed acquisition and a time limit being set on a SPAC’s operating period, if no acquisition is completed. Any SPAC issuers that were unable or unwilling to meet the conditions were to continue to be subject to a presumption of suspension.
On receiving feedback on its proposals, the FCA made alterations to its draft rule changes.
The main changes were:
- Halving the minimum amount a SPAC would need to raise at initial listing, from £200m to £100m.
- Introducing an option to extend the proposed two-year, time-limited operating period (or three-year period, if shareholders have approved a 12-month extension) by six months, without needing to obtain shareholder approval.
- Modifying its supervisory approach: the FCA initially set out in its consultation paper that it would not confirm whether a SPAC would avoid suspension until it identified its target. The new approach provides more comfort to SPACs at the point of listing, that the presumption of suspension will be disapplied. The FCA says it will work with issuers and their advisers to ensure that such comfort is achieved as part of vetting the prospectus and assessing eligibility for listing.
The final rules have been introduced to give larger SPACs more flexibility, providing they contain features that “promote investor protection and the smooth operation of our markets’’. Private companies listing in the UK via a SPAC will still be subject to the full rigour of the FCA’s listing rules and transparency and disclosure obligations.
Banks and the new rules
The FCA is emphasising that risks will still be associated with SPACs, as they are often a complex investment. Issues such as their capital structure, likely returns, possible conflicts of interest among those involved and dilution of shares allocated to sponsors should all be examined in detail before placing funds in a SPAC.
But while these are all, arguably, investor issues, the rule changes will have an impact on the banking sector. That effect is set to be a beneficial one, should SPACs arrive in numbers in the UK. Banks could earn billions of pounds in fees from setting up SPACs. Investment banks are generally in a good position to help find buyers for a SPAC’s shares and, in return, they would typically receive a commission based on the money raised for the initial listing. They would also receive commission when the SPAC completes its deal with the target company.
One great advantage for banks is that the FCA’s changes do not exclude them from advising on a SPAC’s listing. Paragraph 2.16 of the FCA proposal states that such an advisor should be an appropriate independent third party, and adds that this “would not necessarily exclude banks or other companies with which the SPAC has an existing affiliation or service relationship”.
When the FCA put its proposals out for consultation, the point was raised that maybe a fair and reasonable statement should be published to shareholders — based on advice from an appropriately qualified and independent adviser — when any of the SPAC’s directors have a conflict of interest in relation to the acquisition target or its subsidiary. The FCA response included reference to investment banks being an appropriate adviser in such circumstances. It certainly appears, therefore, that banks are in an ideal position to gear themselves up for a slice of the SPAC advisory work as it becomes available.
The FCA has taken action to attract SPACs and offer protection to those investing in them. Both aspects of the FCA’s action look set to bring benefits to the banking world.
Syed Rahman is a partner at law firm Rahman Ravelli.
In-depth insight into global regulation around SPACs can be found in The Banker’s sister publication Global Risk Regulator.
