FCA Clears the Way for Potentially Greater UK SPAC Issuance
Much has been made of the UK’s newfound “freedom” and ability to carve out its own place in the global financial ecosystem after the prolonged, and often tortuous, exit of the UK from the European Union (EU). One of the areas highlighted has been a reform to the listing process in the UK to make London more attractive and compete with other markets around the world.
Following a review by Lord Hill in March of this year, the FCA launched a consultation paper in April proposing changes to the listing rules for Special Purpose Acquisition Companies (“SPACs”) potentially making it easier for sponsors to launch a SPAC in the UK while maintaining adequate protections for investors.
Why get all excited about SPACs?
SPACs are nothing new, but have gained some prominence in 2020 following a bumper year of listings. The FCA, in its April consultation paper (cp21-10), referenced over $80B having been raised through over 200 SPACs in the U.S., with a similar amount in Q1 of 2021 again. This is in comparison with only 33 SPACs in TOTAL in the UK market, 20 that are “live”.
One of the more contentious features of the current rules, which has been credited to London missing out on the SPAC listing rush, is that the listing of a SPAC will be suspended when it identifies a potential acquisition target. The April consultation paper offered a number of compromises that, in the FCAs view, would still provide adequate investor protection but mitigate the need for a trading suspension.
What has the FCA done?
Following the consultation, the FCA has now issued its policy statement. For the most part, feedback from the market was taken into consideration with a notable change being the lowering of the minimum amount a SPAC would need to raise. A list of the “protections” detailed by the FCA is below:
- a ‘redemption’ option allowing investors to exit a SPAC prior to any acquisition being completed;
- ensuring money raised from public shareholders is ring-fenced;
- requiring shareholder approval for any proposed acquisition;
- a time limit on a SPAC’s operating period if no acquisition is completed
- lower the minimum amount a SPAC would need to raise at initial listing from £200 million to £100 million; and
- introduce an option to extend the proposed two-year time-limited operating period (or three-year period if shareholders have approved a twelve-month extension) by six months, without the need to get shareholder approval. The additional six months will only be available in limited circumstances. This is intended to provide more time for a SPAC to conclude a deal where a transaction is well advanced.
These new listing rules will come into force on 10 August and demonstrate a very swift turnaround time for the FCA (the consultation paper was only issued at the very end of April). Although the SPAC market in the U.S. appears to be cooling somewhat with “only” $5.6B being raised in June vs a monthly average of $15.2B, the European market has continued to grow with Amsterdam emerging as an early favourite for listings.
Sponsors of SPACs, which of course includes the private equity market, should welcome these changes as M&A continues its growth in H2. The lowering of the minimum amount required to £100M provides greater flexibility for sponsors allowing private companies of £500M to be targeted (given the 20% free float requirement). The continued protections offered by the new listing rules should give comfort to investors with the redemption offer preventing investors being locked into a transaction that they perhaps are not fully onboard with. Regulators across Europe are monitoring the growing SPAC market with what may be described as “moderate concern.” ESMA stated that SPACs “may not be appropriate for all investors” due to inherent conflicts, and dilution risk, areas that the FCA is specifically looking to address.
It remains to be seen if the changes to the UK listing rules will attract SPAC issuance to the London exchanges, but the pace at which the UK has adapted its rules may indicate an increased appetite for regulatory flexibility, especially as “equivalence” is no longer a viable target for the UK markets. By targeting the risk areas highlighted by ESMA, the FCA may have found a way to limit investors exposure but as with any investment, caveat emptor still holds true.
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