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When it comes to SPACs, one size doesn’t fit all

Changes in the UK’s rules for SPACs should make London a more competitive player in one of the hottest investment movements of recent years — but they are not for everyone, writes Robin Stevens, Head of Capital Markets at MHA UK.

It’s hard to miss the buzz that Special Purpose Acquisition Companies — more commonly known as SPACs — have created on both sides of the Atlantic and beyond over the last two years, even if those with longer memories recall similar conversations in financial cycles past.

In fact, the UK and US have traditionally used the term differently (a good example of that old quip of Britain and the US being two countries divided by a common language).

Depending on where you stood, the term could be used to describe a transaction with a completely different scale or process, even though each approach purported to protect investors, albeit at different stages in the process.

So, what are the differences?

In the US, the typical amount raised by SPACs tends to be higher (more than $80 billion raised on 248 IPOs in 2020), while in the UK the amounts are more modest (about £2 billion raised since 2017).

In each market SPAC refers to the formation of a new investment company with no historic activities, but with a management team experienced in a chosen target sector.

In the US, the typical amount raised by SPACs tends to be higher (more than $80 billion raised on 248 IPOs in 2020), while in the UK the amounts are more modest (about £2 billion raised since 2017).

In the US, shares issued to the initial SPAC investors are generally redeemable if they don’t like the chosen target company or the intended deal for any reason.

The other difference in approach allows the shares of a US-quoted SPAC to be traded after the announcement of the proposed target acquisition.

In the UK, such shares are suspended to avoid a potentially false market in the SPAC shares.

What has driven interest in SPACS?

SPACs typically come into fashion when, as now, the weight of funds looking for new fast-growth public company investments outweighs the queue of aspiring market entrants, particularly in hot sectors such as med-tech, fin-tech and renewables and clean energy.

Although SPAC transactions are often promoted as being a faster and more streamlined process for taking a target business public, in the US the structure has faced criticism for favouring the interests of sponsors and pre-merger (redeeming) shareholders, at the expense of remaining and new shareholders.

SPACs have also been described as self-interested financial engineering, with little real attention paid to the long-term growth of the business. This view is not entirely without merit.

Despite this criticism and having seen the high activity levels on US capital markets, UK, and other international exchanges, such as Hong Kong, Singapore and Amsterdam, have sought to level the playing field.

The goal of these stock exchanges is to attract larger, and in some cases regional, SPAC market entrants and keep both investors and listing vehicles closer to home.

What has changed in the UK?

The UK introduced new rules for SPACs with effect from August 10, 2021, which should allow London to attract new SPAC market entrants. The main change is that — provided SPACs meet certain criteria — the presumption of suspension in trading of the SPAC shares after the announcement of a proposed business combination will be removed.  

For suspension of the SPAC share trading to be avoided, several criteria need to be met. These include that:

  • The SPAC will need to raise £100 million in its initial capital raising.
  • Public shareholder approval be required for any proposed acquisition/ combination. (SPAC founders and directors are prevented from voting on the decision to buy).
  • Investors be able to redeem their shares and exit the SPAC prior to the acquisition being completed.
  • Money raised from public shareholders during the initial capital raising be ring-fenced and cannot be used for anything other than to fund and operate the SPAC.
  • There will be a two-year limit (extendable to three with shareholder approval) on the time following a SPAC’s IPO within which it must complete an acquisition. (This two or three-year period can be extended by an additional six months in limited circumstances).
  • Investors must be given sufficient disclosures on key terms and risks from the SPAC IPO through to the announcement and conclusion of any acquisition.

If a SPAC can’t meet the criteria set, it can still list on the exchange, however it will not benefit from the removal of the suspension of trading.

By way of comparison with changes in competing exchanges, on September 3, the Singapore Stock Exchange introduced a new SPAC listing framework requiring a minimum market capitalisation of S$150 million, a minimum public float of 300 public shareholders holding at least 25% of the issued share capital, a minimum SPAC IPO share price of S$5, and a two or extended three-year period in which to complete a qualifying acquisition.

What does the future hold for the UK as an international market for SPACs?

The changes should give London a chance to compete on a more level playing field with the US and with other markets in mainland Europe and Asia.

The changes should give London a chance to compete on a more level playing field with the US and with other markets in mainland Europe and Asia.

Although the growth in larger SPACs has almost certainly passed for this cycle, the trend will come around again, and the more relaxed rules should attract a greater number of larger transactions to London than would otherwise be the case.

Many UK investors will still prefer to establish smaller SPACs and then return to the market for a further fundraise at the time of the acquisition of the target. Typically, UK-based investors do not like committing significant funds until an acquisition has been identified and the new-found ability of founder shareholders to redeem may not remove this inherent unwillingness.

Still, London is the home to many international funds that will be familiar with the US model, and this might increase the appetite for something more substantial.

The majority of UK SPACs have been structured as sub-£5million fund raises by companies that have listed on the Standard Segment of the Main Market.

The proposed increase in the minimum market capitalisation to £50 million for Standard Segment newly listed companies will mean those smaller SPACs will be redirected towards AIM, where the minimum amount to be raised is £6 million, or towards ASQE, where SPACs with a market cap of £1 million or less remain possible.

The impact on companies looking to achieve public company status through a reverse take-over with a SPAC will also vary.

For established fast-growing companies, a SPAC can be a less attractive route than traditional IPO, unless market uncertainty or commercial dependencies make a fund-raising problematic. If challenges to fund-raising exist, then removing market risk by using a SPAC at the cost of suffering greater dilution can be a price worth paying. 

For early-stage and emerging companies operating in sought-after sectors — which might otherwise be perceived as being too early-stage for a stand-alone IPO — then a SPAC reverse take-over remains a very attractive and accelerated route to market.

It remains to be seen just how the changes will play out, particularly as interest in SPACS ebbs and flows.

However, by improving the opportunity for UK listed companies and investors to take this route, the changes will ensure London capital markets retain and enhance their competitive position for market entrants and investors in the future.

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Robin Stevens

MHA MacIntyre Hudson

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