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Listing reform promises hope for UK special purpose acquisition companies, but is it enough?

The UK’s Financial Conduct Authority (FCA) recently opened its long-awaited consultation on proposed rule changes to facilitate listing special purpose acquisition companies (SPACs) on the London Stock Exchange. There can be little doubt that a ‘fear of missing out’ is forcing the UK regulator’s hand. 

While SPACs, sometimes called cash shells or blank-cheque companies, are nothing new in the UK, they make up a very small proportion of annual listings. The FCA estimates that there are only 33 SPACs currently listed in London, of which two-thirds have a market capitalisation of less than £5m. In comparison, the US – the SPAC market leader – saw nearly 250 SPACs listed in 2020 and $100bn raised in that year alone. 

Some of the fizz has undoubtedly gone out of the US market. The US Securities and Exchange Commission recently intervened, issuing warnings about investing in SPACs promoted by celebrities and about SPACs using bullish projections in determining valuations of an acquisition target company, as well as requiring virtually all SPACs to restate the accounting treatment of their warrants. Nevertheless, SPACs are undoubtedly here to stay. 

Swift and sure

At the heart of the structure’s appeal is the speed and certainty afforded to a target company seeking an initial public offering (IPO), compared with 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 price negotiations to a smaller group of stakeholders. 

However, the UK listing regime is not conducive to SPACs. The main drawback is the general presumption, contained in the listing rules, that a SPAC’s listing will be suspended on identification of a target company until the acquisition completes. Suspension seeks to preserve market integrity during a period when limited information may be available on a prospective deal. Of the 33 SPACs listed in London, 13 currently have their listing suspended, meaning that investors are locked in and cannot trade shares pending completion of the acquisition.  

The FCA must tread a fine line, ensuring that the London markets do not lag behind their global competitors

Lord Hill’s UK Listing Review, published in March this year, called on the FCA to implement a number of reforms, including removing this listing suspension requirement and giving shareholders who oppose the acquisition of the target company the possibility of retrieving their money.  

The FCA must tread a fine line, ensuring that the London markets do not lag behind their global competitors (including those in Europe, such as Euronext Amsterdam and the Frankfurt Stock Exchange, which have already welcomed several SPAC listings this year), while providing adequate safeguards for investors. The FCA acknowledged this dichotomy when launching the current consultation, referencing the need for a nimble approach to policy-making while being guided by the principles of “robust regulation, high standards and strong safeguards”. 

The result is that while the proposals remove the presumption that a SPAC’s listing will be suspended on identification of a target company, this relaxation will only be available to SPACs that adhere to special disclosure and investor protection features.  

Copying the US?

Many of these features, such as the enhanced disclosure regime for SPACs throughout their lifecycle and the requirement for the acquisition of the target company to be subject to shareholder approval, will raise few eyebrows. Others simply seek to replicate the US SPAC model, including: the requirement for funds raised at IPO to be ring-fenced to fund an acquisition or returned to shareholders; the mandatory redemption option allowing investors to exit a SPAC prior to any acquisition being completed; and the time limit on a SPAC’s operating period if no acquisition is completed. 

However, what has caused consternation is the requirement that SPACs raise a minimum of £200m at IPO to benefit from the rule change. The FCA argues that this will lead to a high level of institutional investor participation to ensure adequate scrutiny of the investment proposition. But by setting the threshold at this level, just how much of an impact will the new rules have? Of the 33 SPACs currently listed in London, only two have a market capitalisation greater than £100m. Unless the proposed threshold is reduced to a more realistic level, there is a danger that the UK markets will continue to miss out on the lucrative SPAC market. 

Delphine Currie, Panos Katsambas and Ari Edelman are partners at Reed Smith.

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