SPACs: FCA proposes end to suspensions during a takeover

Rick Steves

“Our position outside the EU allows the FCA to have a new, more nimble approach to domestic policymaking. But in doing so, we are guided by the principles of robust regulation, high standards, and strong safeguards.”

The Financial Conduct Authority is proposing changes to its Listing Rules for certain special purpose acquisition companies (SPACs) as the UK financial watchdog further aims to exercise its regulatory independence post-Brexit.

The FCA intends to allow an alternative approach for listed SPACs that are able to demonstrate the higher levels of investor protection that have developed in certain overseas jurisdictions, it stated, adding that currently a SPAC listing is typically suspended at the point it identifies an acquisition target.

Suspension seeks to preserve market integrity during a period when limited information on a prospective deal could result in disorderly trading in a SPAC’s shares.

However, suspension effectively locks investors into a SPAC at the point a target is announced, potentially for many months prior to completion, which is undesirable for investors and issuers.

The regulatory proposal from the FCA is that compliant SPACs should not be subject to this requirement.

Clare Cole, Director of Market Oversight at the FCA, said: “We are consulting on a set of clear conditions based on which we will not look to suspend the listing of a SPAC. These changes should encourage issuers that are willing to provide transparency and strong protections to investors. This should support market confidence and aligns our approach more closely with standards in other international markets.

“We would expect our changes to provide a more flexible regime for larger SPACs, while still ensuring investor protections, potentially resulting in a wider range of large SPACs listed in the UK, increased choice for investors, and an alternative route to public markets for private companies.”

“Our position outside the EU allows the FCA to have a new, more nimble approach to domestic policymaking. But in doing so, we are guided by the principles of robust regulation, high standards, and strong safeguards.”

As a relatively complex investment vehicle, SPACs require investors to understand both the capital structure of each SPAC and assess the potential value and return prospects of any acquisition target that is later proposed.

The disclosure and investor protection features the FCA proposes SPACs should include in order to avoid suspension, and on which the consultation seeks feedback, include:
• setting a minimum amount of £200m to be raised when a SPAC’s shares are initially listed, to encourage a high level of institutional investor participation
• ensuring monies raised from public shareholders are ring-fenced to either fund an acquisition or be returned to shareholders, less any amounts agreed to be used for the running costs of the SPAC
• ensuring shareholder approval for any proposed acquisition, based on sufficient disclosure of key terms and a confirmation that terms are fair and reasonable if any of the SPAC’s directors have a conflict of interest relating to a target company
• a ‘redemption’ option allowing investors to exit a SPAC prior to any acquisition being completed, and a time limit on a SPAC’s operating period if no acquisition is completed
• sufficient disclosures being provided to investors on key terms and risks from the SPAC IPO through to the announcement and conclusion of any reverse takeover deal
SPAC issuers unable to meet the conditions, or those choosing not to, will continue to be subject to a presumption of suspension.

The FCA is consulting for 4 weeks on these proposals. Feedback from the full range of stakeholders will be taken into consideration as the regulator designs the new rules and/or guidance by early summer.

The regulator first confirmed it would launch a public consultation on SPACs in late March 2021.

“The regulator is considering the structural features and enhanced disclosure, including a minimum market capitalization and a redemption option for investors, required to provide appropriate investor protection”, the FCA stated at the time.

SPACs have become the new trend in buyouts. UK’s chancellor, Rishi Sunak, has recently jumped on the bandwagon and commissioned a review of the London Stock Exchange rules. The government review led by former EU commissioner Jonathan Hill has made the loosening of restrictions on SPACs a priority.

The review suggested removing a requirement for trading in SPAC shares to be suspended during a takeover so investors have time to scrutinize the deal.

In the US, the SPAC craze has already led the SEC to issue a warning to investors amid the growing trend of celebrity endorsements of special purpose acquisition companies.

“SPAC sponsors generally acquire equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market. As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combination and may have an incentive to complete a transaction on terms that may be less favorable to you”, said the SEC.

In April, the SEC warned investors of risks to private companies merging with SPACs. The regulator is addressing certain accounting, financial reporting, and governance issues that should be carefully considered before a private operating company undertakes a business combination with a SPAC.

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