SPACs and the Need for Change

Syedur Rahman of Rahman Ravelli assesses how the UK is considering making the City more appealing to special purpose acquisition companies (SPACs).

The rise of special purpose acquisition companies (SPACs) has prompted huge levels of investment in the United States. But while the vast amounts of capital being raised for the purposes of SPACs can certainly be viewed as a US phenomenon, they are also attracting attention from many other countries – and those countries’ regulators.

It is clear that the UK is looking closely at SPACs. This has been shown by the official response so far, with the UK starting to make noises about updating the UK Listing Rules to enable SPACs to become a reality here. 

This is, arguably, an understandable response, as the UK is currently unattractive for SPACs and their investors. The current presumption that trading in a SPAC’s shares should be suspended upon announcing a potential acquisition or merger target nullifies the main appeal of a SPAC – that it is a less onerous listing process. It also means that investors have no freedom to exit, regardless of whether or not they approve of the deal that is proposed, and companies seeking a SPAC acquisition or merger still have to produce a full prospectus and meet free-float requirements.

Lord Hill’s Recommendations

In March this year, Lord Hill published his recommendations from the UK Listing Review. The Review started five months earlier at the request of the Chancellor, in an attempt to boost the UK’s standing as a destination with worldwide appeal for equity listings. It makes recommendations that are necessary for London to bridge the gap that has developed between it and its competitors.

The recommendations include:

• The Chancellor presenting an annual, state of the City report to parliament, outlining what is being or will be done to enhance London’s status as a global financial centre. Statistics for initial public offerings, amount of capital raised and trade volumes should be included, along with a breakdown of areas of success and those requiring improvement.
• The Financial Conduct Authority’s (FCA’s) statutory objectives in relation to the Future Regulatory Framework Review should be assessed to ensure they give it scope to help create an attractive competitive environment for companies looking to list; including any necessary tightening or relaxation of regulation. 
• Improving the environment for companies to go public in London. This includes encouraging them to list in London at an earlier stage of their development and allowing companies with dual class share structures to list in the premium listing segment while maintaining high corporate governance standards during a transition period. This transition period could last up to five years and could include measures such as requiring B class shareholders to be directors, restricting transfers of B class shares and limiting voting so holders can continue as directors. The aim of this would be to help founders ensure control is retained. 
• Rebranding and remarketing the standard listing segment of the official list to boost its profile.
• Reassessing the free float requirements to provide a better measure of liquidity during and post listing.
• Reviewing and updating the definition of what constitutes shares in public hands so that it considers whether shares are, in fact, contributing to liquidity.
• Modifying the rule that requires the suspension of shares of SPACs on announcement of a potential acquisition - in order to harmonise with rules in the US and some parts of Europe - and adding shareholder protections, including voting on acquisitions and the ability to redeem shares when an acquisition is complete.
• Reviewing and redesigning the prospectus regime to accurately reflect the scope of UK markets and the types of business coming to market. This may involve treating admissions to a regulated market and offers to the public separately, using alternative listing documents where appropriate and tailoring information to meet investors’ needs better.

The Review proposes:

• Amending the liability regime for issuers and their directors to facilitate the provision of forward-looking information in prospectuses. But safeguards would exist, such as directors having a defence to liability if they exercised due care and diligence in compiling the information and can show they believed in its truthfulness at the date of publishing.
• Maintaining the three-year track record requirement for the premium listing segment. But conducting a review of provisions for scientific research-based companies regarding the revenue earning requirement.
• Changing the requirement for historical financial information covering at least 75% of an issuer’s business for premium listings, so that this test only applies to the most recent financial period within the three-year track record.
• Empowering retail investors and improving the raising of capital for existing listed issuers.
• Examining how technology can improve retail investor involvement in corporate actions and re-establishing the Rights Issue Review Group to improve the efficiency of further capital raising by listed companies.
• Improving the efficiency of the listing process.
• Examining other areas of the financial system, such as unlocking pension investment, ensuring the tax environment is competitive and boosting provision and funding of SME research.

While the Review’s findings and recommendations are wide-ranging and forward thinking, it remains to be seen what change they produce. For most of the recommendations, the decision to make them a reality rests with either the FCA or the Treasury. 

The FCA has already welcomed the review and intends to publish a consultation paper by this summer and implement new rules by the end of 2021, subject to the feedback on the consultation and government support.

At the end of March, the FCA stated that its consultation was being opened to determine what structural features and enhanced disclosure were needed to give investors appropriate protection in SPACs. It will consider what changes are necessary to the UK Listing Rules to create an attractive market environment for SPACs. It has indicated that the current presumption of suspension of the listing for such companies when an acquisition or merger target is announced, will not be required any longer – which is a major obstacle to SPAC listing in London.

In its announcement, the FCA said: “We will be consulting shortly on amendments to our Listing Rules and related guidance to strengthen protections for investors in Special Purpose Acquisition Companies (SPACs). The consultation will consider the structural features and enhanced disclosure, including a minimum market capitalisation and a redemption option for investors, required to provide appropriate investor protection. 

“Our proposals will help to ensure that SPACs operate within a framework of high regulatory standards and oversight. Where such protections are in place, we consider that the existing presumption of suspension of the listing for such companies at the point of announcement of an acquisition target is no longer required and we therefore intend to consult on this basis, aligning this element of our rules more closely with other major jurisdictions.’’

There is little doubt that greater protection of investors would be welcomed, as would moves to help companies raise capital while allowing their creators to retain more control than at present. 

At the time of writing, it remains to be seen whether the FCA will focus on strict financial reporting and disclosure documents for those registrants of SPACs. One of the concerns is that SPACs have a limited timeframe to take a company public. This means there will be competing interests – those of the sponsors of the SPAC and those of the shareholders. The sponsors may well be incentivised to complete an acquisition quickly, even if it harms the shareholders. This is a point that will need to be addressed in any consultation.