Exit through the SPAC door?
UK FCA publishes proposed changes to the Listing Rules

The UK Financial Conduct Authority ("FCA") has published its proposals to amend the Listing Rules relating to special purpose acquisition companies ("SPACs"), having considered Lord Hill’s UK Listing Review Report.

The proposed changes, if implemented, will only apply to SPACs which meet certain prescribed criteria, including the requirement to raise aggregate gross cash proceeds from public shareholders at IPO of at least £200 million (excluding any funds from founders / directors / sponsors / promoters, or "sponsors").

The consultation period closes on 28 May 2021 and the new Listing Rules are expected to be in force by early summer 2021.

Existing regime

SPACs currently admitted to listing on the standard segment of the Official List of the FCA are subject to a presumption that their shares will be suspended on the announcement of (or a leak relating to) a de-SPAC acquisition which constitutes a "reverse takeover" for the purposes of the Listing Rules. This presumption is meant to ensure that a disorderly market is avoided as a result of incomplete information about an acquisition being available at the time of its announcement (or leak).

Where a suspension is triggered, existing investors in the SPAC are unable to trade for uncertain period of time until a prospectus is published in respect of the enlarged group, or the acquisition is abandoned. This approach contrasts with the corresponding one in the US, which allows trading to continue on Nasdaq and NYSE throughout the de-SPAC process.

To avoid suspension under the existing Listing Rules, a SPAC must provide substantial disclosure to the market including three years’ financial information on the target and the key differences between the SPAC’s accounting policies and those of the target. Preparing this amount of information can be a time-consuming task and can lead to a significant period of suspension in the shares whilst the information is produced. Upon publication of a prospectus, the SPAC’s listing is cancelled, and the enlarged group must reapply for listing.

Under the existing Listing Rules (in contrast to the AIM Rules for Companies), there is no requirement for a shareholder meeting to approve any acquisition which is in keeping with a SPAC’s stated investing policy and articles of association (or equivalent constitutional document).

Proposals

The FCA proposes to remove the suspension presumption, subject to a SPAC satisfying the following criteria:

Size threshold

Aggregate gross cash proceeds from public shareholders at IPO must be at least £200 million, excluding funds from any sponsors.

Ring-fenced proceeds

Cash raised from public shareholders must be ring-fenced, via an independent third party, and only used to fund:

• an acquisition (approved by the board and public shareholders);
• redemption of shares from public shareholders; and
• repayment of capital to public shareholders if the SPAC winds up/fails to make an acquisition within the time limit

Ring-fenced proceeds may exclude such sums as the SPAC requires to fund its operations, provided the quantum of such funds is disclosed in its IPO prospectus.

The FCA noted that it may be appropriate to ring-fence proceeds in a trust or escrow account.

Acquisition deadline

A SPAC must be time limited.

The proposal is for a two year deadline from admission, which can be extended by up to one year if a target acquisition has been identified and announced within the initial two year period, but not yet completed (subject to shareholder approval). That deadline must be enshrined in the SPAC’s articles of association (or equivalent constitutional document) and made clear to investors in its IPO prospectus.

If the SPAC fails to complete an acquisition within the two or three year period, as applicable, the SPAC must be wound up, the ring-fenced proceeds returned to shareholders and its listing cancelled.

Fair and reasonable statement

The SPAC’s articles of association (or equivalent constitutional document) must provide that, where a SPAC director has a conflict in relation to the target or the target group, the board of the SPAC must publish a statement that the proposed transaction is fair and reasonable as far as the public shareholders of the SPAC are concerned, supported by the advice of a qualified and independent adviser.

The FCA is consulting whether a fair and reasonable statement might be a requirement for all SPACs, not just those where there is a conflict of interest with a SPAC director.

Board and shareholder approval

The SPAC’s articles association (or equivalent constitutional document) must provide for:

• board approval of any proposed acquisition (excluding any interested director); and
• approval by a majority of public shareholders (i.e., excluding the SPAC’s sponsors).

Disclosure

The SPAC’s IPO prospectus must include sufficient disclosure, including the full structure of the offer (including any warrants and their terms), details of management’s experience, their strategy, risk factors and conflicts of interest.

The announcement of any acquisition must contain:

• a description of the target business and the material terms of the proposed transaction (including the expected dilution effect on public shareholders from securities held by, or to be issued to, the sponsors);
• links to all relevant publicly available information on the target (e.g., its most recent publicly filed annual report and accounts);
• proposed timeline for negotiation of the transaction;
• the SPAC’s valuation methodology, as applied to the target;
• any other details of which investors should be aware in order to make a properly informed decision; and
• if applicable, an acknowledgement where certain information has been omitted because it is not known at the time of the announcement.

The FCA noted that, prior to the shareholder meeting to approve any acquisition, the SPAC must keep shareholders updated regarding the above, and that, in any event, the SPAC will remain subject the Disclosure Guidance and Transparency Rules and the UK version of the Market Abuse Regulation.

Shareholder redemption option

SPACs must provide a redemption option to shareholders to exit before any acquisition completes.

Any redemption option must specify a predetermined price at which shares will be redeemed (either a fixed amount or fixed pro rata share of the ring-fenced cash proceeds, less pre-agreed amounts the SPAC retains for its running costs).

The terms of the shareholder redemption option must be set out in the SPAC’s IPO prospectus.

Orrick commentary

In our recent experience acting on a number of London-listed SPAC IPOs and de-SPAC acquisitions, successful SPACs have tended to be backed by entrepreneurs raising sufficient funds at IPO to fund due diligence of prospective acquisitions and cover running costs (rather than larger amounts of cash to be sat on their balance sheets), making clear in their IPO prospectuses that a larger, potentially dilutive financing would be required to finance a de-SPAC acquisition. The possibility of a trading suspension period is a risk factor in the IPO prospectus and built into the timetable for effecting the de-SPAC acquisition and listing the enlarged group.

Caveat emptor has applied. Shareholders seem to have appreciated that they are investing in a relatively speculative asset class and that a SPAC’s announcement of a proposed de-SPAC does not necessarily mean the transaction will be consummated, and it takes time for a SPAC and its target to produce a prospectus, go through the FCA approval process and implement a further financing. Relative to US and European SPACs, however, most London-listed SPACs have not raised a large amount of public shareholder cash.

The FCA has recognised the growth of the US and European SPAC market and the potential appetite for larger SPACs in the London market – hence the £200 million minimum public shareholder raise criterion. However, it remains to be seen whether institutional investors that are either not currently mandated or (dare we say it) prepared to invest in London-listed SPACs will do so in the future.

We are confident that there will continue to be a market for smaller (sub-£200 million) London-listed SPACs, and it will be interesting to see whether any of the proposed changes to the Listing Rules filter down to those vehicles (in particular, the requirement for a shareholder approval of any acquisition).

It is also noteworthy that the FCA has indicated that it may seek to:

• establish a separate listing segment for SPACs, which would have its own rules following on from Lord Hill’s review; and
• differentiate its approach to SPACs focused on sustainability and investing based on environmental, social and governance factors (e.g., "green" SPACs), which may be required to provide disclosures aligning with the Task Force for Climate-related Financial Disclosure initiative, the trade-off being a lower initial capital raising threshold or a longer time to complete an acquisition.

Watch this space.