The use of special purpose acquisition companies (“SPACs”) in equity capital markets has boomed since the beginning of the COVID-19 pandemic and is proving increasingly popular as the record-breaking number of global SPAC initial public offerings (“IPOs”) in 2020 has already been surpassed in the first quarter of 2021 alone. This meteoric rise has largely been driven by SPAC activity in the U.S. but this trend may soon be subject to change in light of reforms that have been proposed as part of a UK government commissioned review to liberalise UK SPAC rules (the “Hill Review”), the FCA’s Consultation Paper (CP21/10) published on 30 April 2021 (“FCA Consultation”) and recent investment activity, including the £135 million secondary fundraising by SPAC, Marwyn Acquisition Company I Limited (now named AdvancedAdvT Limited) announced on 18 March 2021, which is reportedly the largest amount ever raised by a UK SPAC; Brown Rudnick LLP advised N+1 Singer in respect of their role as placing agent for this fundraise.
This article serves to provide an overview of SPACs and how they are listed in the UK and the U.S., review key market trends, including recent developments in the U.S. SPAC market, examine pros and cons of a SPAC acquisition in the current market, and assess the findings of the Hill Review and the FCA’s Consultation and what this may mean for the UK SPAC market.
WHAT ARE SPACS? SPACs, also known as “blank cheque companies” or “cash shells”, are entities incorporated with the sole purpose of raising a pool of cash to acquire one or more private companies seeking to raise capital and become publicly traded. A SPAC will typically target an identified industry sector or geographic region.
Following incorporation, a SPAC raises funds for acquisitions through an IPO, listing its shares on a public stock exchange. In advance of the IPO, the founders (also known as “sponsors”) will incorporate the SPAC and typically serve as directors on the SPAC’s board and their executive officers. Whilst the SPAC will not have any business operations or assets (other than the IPO funds that, especially for U.S. SPACs, are held in trust), it will have an experienced management team, including the founders, focussed on identifying suitable acquisition targets. On the SPAC IPO, investors will typically receive shares and warrants (or a fraction of a warrant) in the SPAC (via units when investing in U.S. SPACs). The founders will often retain a 10%-20% equity holding and may hold a combination of ordinary shares / common
stock or preferred shares entitling them to a certain proportion (often 20%) of the upside when the listed share price of the SPAC post-acquisition reaches a certain level (the “promote” structure), which is designed to incentivise the founders to generate value for the SPAC investors. The sponsors also typically purchase warrants in the SPAC in a private placement that occurs concurrently with the IPO, with terms substantially similar to the public warrants. In the U.S., these warrants are restricted securities and the sponsor typically cannot sell them or transfer such shares until following the completion of an acquisition. This investment is the sponsors’ “at-risk” capital because the warrants will be lost if an acquisition does not occur.
Certain SPAC structures have sought to offer further protections to its founders by issuing shares with additional rights in respect of the management of the SPAC e.g. director appointment rights In addition, forward purchase agreements documenting advance share subscriptions may be entered into between the SPAC and its founders to provide additional funding for acquisitions and/or additional working capital requirements if needed by the SPAC.
Once an acquisition has been completed by the SPAC, the acquired company shall become publicly listed via a reverse takeover, without having to go through an IPO process In the event that an acquisition is not made within the specified timeframe (typically 18 24 months), the SPAC will be dissolved and the funds raised for the purpose of acquiring certain companies will be returned to its shareholders.
RECENT TRENDS AND DEVELOPMENTS
In recent years, the U.S. market has seen a boom in the number of SPACs listing on its stock exchanges. According to SPACInsider, nearly 250 SPACs listed in the U.S. in 2020 raising approx. $83.4 billion, whereas U.S. SPAC IPOs for the first quarter of 2021 raised in excess of $90 billion, with circa 290 SPACs having been listed. However, as discussed further herein, the market has cooled in the U.S. recently due to, among other things, recent pronouncements from the U.S. Securities and Exchange Commission (the “SEC”) .
The largest SPAC deal to date was announced on 13 April 2021 when Grab Holdings Inc., a ride-hailing, food delivery and digital wallet group, announced recently that it would go public on the NASDAQ Stock Market via a $39.6 billion merger with Altimeter Growth Corp, a SPAC sponsored by Altimeter Capital.
Other recent SPAC activity includes the proposed acquisition of Liberty Tax, a leading tax return preparation service provider, and LoanMe, an established consumer and small business lender, by NextPoint Acquisition Corp., a Canadian SPAC, with a combined enterprise value of $643 million. Brown Rudnick LLP has advised NextPoint in connection with their IPO and the proposed acquisitions.
SPACs have also gained popularity in other markets, including Amsterdam, Frankfurt and Hong Kong. The main reason for the increased popularity in SPAC listings is thought to be the relevant speed with which acquisitions of target companies can be completed compared to undertaking an IPO. SPACs may also offer a higher valuation for target companies than would otherwise be obtained in an IPO.
The UK market has so far lagged behind its competitors in terms of SPAC listings. In 2020, only four SPACs were listed in the UK raising approximately £30 million, including Marwyn Acquisition Company I Limited, and no SPACs have been listed in the UK so far this year. However, the proposed changes to the Listing Rules put forward in the Hill Review (as considered below) would serve to make the UK a more attractive destination for SPAC listings and increase competition with other financial centres including New York, Amsterdam and Frankfurt, should such changes come into effect.
SPACs are not the only ECM trend to migrate to the UK from the U.S. in recent times as interest in U.S.-style private investments in public equity ("PIPEs") increases. Brown Rudnick LLP advised Victoria P.L.C. in respect of a £175m investment by Koch Industries in the reportedly first ever U.S.-style PIPE for a UK listed company in November 2020, which was structured using preferred shares.
Brown Rudnick has represented multiple SPACs during their IPO process.
RECENT SLOWDOWN IN U.S. SPAC MARKET
In the U.S., SPACs have recently come under increased scrutiny from SEC. With the boom in the U.S. SPAC market, the SEC, in perhaps a bid to slow the market down and subject the regulatory filings to greater scrutiny, has issued guidance cautioning companies on, among other things, the accounting treatment of warrants.
On April 12, 2021, the SEC published a statement by the Acting Director of Corporate Finance and Acting Chief Accountant, which set forth their views on the accounting treatment of warrants that are issued by SPACs. Typically, SPACs have classified warrants on their balance sheets as equity.  However, the recent statement has suggested that the SEC staff believes the warrants issued by SPACs with certain features should be properly classified as liabilities. This classification would require companies to periodically account for changes in the warrants’ value.
For those SPACs that have completed their IPO and have made an error in the classification of the warrants, this announcement requires these companies to review their previously-filed financial statements and assess whether the error was material, such that a restatement of the previously-filed financial statements would be required. In addition to a restatement, a company must also assess prior disclosures relating to its internal control over financial reporting. This process must also be applied to those SPACs with pending or completed deals.
SPACs that are in the registration process will need to determine whether any changes to their regulatory filings and accounting methods are required before they can get through the SEC review process, as the SEC staff has indicated that they will not allow registration statements to go effective if the accounting issue is not considered and, where necessary, corrected.
This development, coupled with a general slowdown in the frothy SPAC market, has effectively brought the U.S. SPAC market to a standstill. This is evidenced by the stark difference in SPAC IPOs in March 2021 versus April 2021 (to date): 109 to 10, respectively.
In the UK, SPACs are not eligible for listing on the Premium segment of the Main Market as they do not meet the independence and track record requirements that apply under the Listing Rules (the regulations, overseen by the Financial Conduct Authority (“FCA”), with which UK-listed companies must comply) for a premium listing of a commercial company. However, such eligibility requirements do not apply to a listing on the Standard segment of the Main Market which, along with the fact that Standard listed companies are not required to obtain shareholder approval for material acquisitions post-listing, means that the Standard segment is the preferred listing venue for SPACs in the UK.
A listing on the AIM market of the London Stock Exchange is another possibility for SPACs as AIM companies are not required to have a minimum track record. However, there are a number of aspects of the AIM regime, such as the AIM requirement that reverse takeovers must be approved by shareholders, which means that the Standard segment is generally considered to be a more attractive listing venue for SPACs in most cases. Furthermore, the minimum IPO raise on the Standard segment is £700,000 as opposed to £6,000,000 on AIM (the minimum cash threshold for admission of a SPAC as an investing company).
The initial acquisition by a SPAC will constitute a reverse takeover, whether the SPAC is listed on the Standard segment or on AIM. Therefore, on completion of the acquisition, the listing of the SPAC’s shares will be cancelled. Consequently, if the SPAC’s listing is to be maintained, the SPAC is required to publish a prospectus or AIM admission document (as applicable) so as to be re-admitted to trading; such documentation is required to contain detailed information on the acquisition and on the enlarged business of the SPAC. Following announcement of the acquisition, trading in the SPAC’s shares will typically be suspended until the prospectus or AIM admission document is published (the “Trading Suspension”).
In the U.S., those SPACs wishing to conduct an IPO must determine which marketplace to list on, with almost all listing on either the NASDAQ Stock Market or the New York Stock Exchange (NYSE). The requirements for listing on either exchange are similar, and each exchange will waive the listing fee for doing so.
DOING DEALS WITH SPACS
have a number of advantages and disadvantages when doing deals in the current market.
As a SPAC is already a public company at the point of its acquisition, this simplifies the process for a private company to go public with only an acquisition being required as opposed to a listing In addition, a SPAC acquisition creates more certainty in relation to the amounts to be received by the private company as opposed to by way of an IPO, and may enable a private company that cannot get an IPO off the ground to go public.
However, the failure by a SPAC to complete a suitable acquisition within its lifetime, resulting in the unwinding of the SPAC, offers poor returns for its shareholders Furthermore, critics of the SPAC business model believe that a SPAC fails to ensure that its management team will make a true strategic assessment of opportunities, given the potential time restrictions to utilise capital resources Higher interest rates are also likely to make SPACs less appealing to certain investors given their
reliance on future earnings.
THE HILL REVIEW AND THE FCA CONSULTATION PROPOSED REFORM TO UK LISTING RULES
On 3 March 2021, the UK Government published the results of the Hill Review, which was carried out by Lord Jonathan Hill. The Hill Review sets out proposals to reform the current listing regime to strengthen the UK’s public markets and to encourage companies to list in the UK.
The Hill Review notes that since 2008, the number of UK-listed companies has fallen by around 40%, with businesses choosing to go public in other financial centres in the U.S. and Asia, as well as elsewhere in Europe. During the period from 2015 to 2020, only 5% of global IPOs were in London.
The Hill Review sets out various proposals to improve the environment for businesses to list on the London Stock Exchange, including recommended changes to the Listing Rules to make the UK a stronger market for SPACs to list. The proposed amendment to the Listing Rules would see an end to the Trading Suspension, which applies from the time a SPAC acquisition is announced until the FCA approves the company’s application for re-admission to trading. The Hill Review suggests replacing the Trading Suspension with rules and guidance covering:
- information to be disclosed by SPACs upon the announcement of an acquisition;
- the rights which SPAC investors must have, both to vote on acquisitions and to redeem their initial investments, prior to the completion of an acquisition; and
- whether a trading suspension will continue to apply for certain SPACs.
The FCA Consultation sets out proposed new Listing Rules that could lead to a waiver on the current rule that trading in a listed SPAC should be suspended at the point where it identifies a company to acquire. The issue the FCA is seeking to address is where a suspension, aimed at preserving market integrity until more information on the target company is made available, can trap investors in the SPAC for potentially many months.
- The proposals include that:
suspension would be waived if a minimum threshold of £200 million is raised when a SPAC initially lists, which is hoped will attract more institutional investors;
- cash raised from public shareholders i e non sponsors, should also be ring fenced i e placed in escrow) for an acquisition, or returned to shareholders less running costs of the SPAC) with a ‘ option allowing investors to exit a SPAC at a fixed price before any acquisition
- shareholder approval would be needed for any proposed acquisition and
- a time limit on a SPAC’s operating period of 24 months from admission if no acquisition is completed within that time.
The FCA has adopted a number of the US features which we don’t ordinarily see in the UK such as the requirement to escrow or ring fence initial funds raised and for investors to be able to approve the acquisition or the redemption of their funds (which in the US is paid with accrued interest) in the event they decide they don’t want to be associated with the acquisition target Those US features have their downsides too as they can result in, among other things, uncertainty as to whether the SPAC will be able to complete a proposed transaction, in the case of the requirement for shareholder approval, or require the SPAC to raise additional funds (for example, in the PIPE offering) in order to have sufficient funds to close a transaction and redeem those shareholders who elect redemption.
We view the FCA’s proposals as an approach that the larger SPACs are going to welcome (though to date there are only 2 SPACS in the UK which have raised over 100 million )and understand the FCA’s aim to promote confidence in the larger listings by offering a more flexible regime and investor protections However, the proposed changes will not necessarily lead to an increase in the larger SPACs as some sponsors may not see such Listing Rule changes as an attractive proposition and sponsors are not going to relish having to obtain shareholder approval for an acquisition nor giving investors redemption rights which leads to uncertainty The proposals do not prevent SPACs with a threshold of less than 200 million from listing in the UK which attract a different type of investor who is more accepting of the risks and isn’t adverse to a SPACs suspension on a de-spac The effect of the FCA’s proposals is to create a dual system for SPACs with regard to investor protection
depending on the amount of the initial fundraising Further, even if a SPAC complies with the features in the FCA guidance, it will still need to seek FCA approval to discharge the presumption of suspension which will be based on an assessment of the SPAC at that point in time Also note that any new operating company emerging from a SPAC acquisition will still need to apply for a new listing and demonstrate that they satisfy the eligibility criteria and ongoing listing requirements.
The FCA’s proposals are in the main to protect investors in larger SPACs and ensure they are aware of the risks involved Such guidance will provide investors with additional safeguards allowing them to properly assess the merits of SPACs, as well as offering shareholders additional protections at the time of an acquisition Subject to the outcome of the FCA Consultation and approval from the FCA, the proposed changes may be introduced by early summer 2021.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.