Unlocking the market: FCA revises UK SPAC listing rules

December 2021 | FEATURE | CAPITAL MARKETS

Financier Worldwide Magazine

December 2021 Issue

In a bid to overturn the perception that London is not a viable listing venue for special purpose acquisition companies (SPACs), the UK Financial Conduct Authority (FCA) has published changes to the listing rules for SPACs seeking to list on the main market of the London Stock Exchange.

The FCA’s revisions follow recommendations made by Lord Hill in the 2021 UK Listings Review as to how to make capital markets more dynamic and effective for issuers and investors, improve the global competitiveness of the UK and encourage investment in UK businesses.

Certainly, the number of UK SPAC listings is in stark contrast to that of the US and Europe, According to Deal Point Data’s ‘Special Purpose Acquisition Company (SPAC) Market Study 2021’, the level of SPAC activity has accelerated to unprecedented levels in the initial public offering (IPO) and M&A markets – 2020 saw a 320 percent increase in the number of SPAC IPOs compared to 2019 – with the US the market leader.

In Europe, the popularity of SPACs is spreading, with the Amsterdam and Frankfurt stock exchanges seeing a series of SPAC listings in 2021 (15 deals in Q2 raised $3.7bn, followed by seven in July worth $1.4bn). In the US, from 2020 to the end of Q1 in 2021, US SPACS had raised on average more than $300m. In comparison, the UK SPAC market was essentially dormant in 2020, raising a paltry £30m.

So, in a bid to make the UK an attractive market for domestic and overseas SPAC listings, the FCA has removed the presumption of suspension for SPACs that meet certain criteria which are intended to strengthen the protections for investors, while maintaining the smooth operation of the market. The changes are designed to provide an alternative approach for SPACs that must otherwise provide detailed information about a proposed target to the market to avoid being suspended.

“The changes are designed to provide an alternative approach for SPACs that must otherwise provide detailed information about a proposed target to the market to avoid being suspended.”

“The FCA’s keystone change removes the general presumption that the FCA will suspend the listing of a SPAC when it identifies a potential acquisition target and will be satisfied that a suspension of a listing is not required – if the UK SPAC has certain optional features built into its structure and makes certain disclosures to protect investors,” explains David Broadley, a partner at Allen & Overy. “As this feature of the Listing Rules was seen as a deterrent to listing a SPAC in London, the move is designed to attract more SPAC listings to London while maintaining protection for investors.”

Reversing presumption of suspension

As set out in the FCA’s policy statement, a UK SPAC is required to meet the following criteria if the FCA’s presumption of suspension of listing is to be reversed.

First, size threshold. A UK SPAC needs to raise £100m or more on its initial listing, from public shareholders, excluding the founder, sponsor and directors, in order to achieve a high level of institutional investor participation. This is a reduction from the £200m threshold contemplated in the FCA consultation.

Second, ringfencing of SPAC proceeds for business combination, redemption or repayment purposes only. Proceeds raised from the public on listing need to be held via an independent third party, for example in escrow or via a trust, to protect investors from expropriation or the risk of the SPAC’s management incurring excessive running costs.

Third, time limit for completing a business combination. The SPAC has to identify its target and complete its business within two years of its admission to listing, subject to extension of this operating period to three years, with public shareholder approval. There is an option to extend the relevant operating period by a further six months without shareholder approval, in limited circumstances.

Fourth, board and shareholder approval of a business combination. There is a need to ensure board approval for any proposed business combination and shareholder approval for any proposed business combination, excluding the SPAC sponsors, founders and directors. The exclusion of sponsors, founders and directors diverges from European and US practice.

Finally, redemption option for shareholders. There must be a redemption option permitting investors to exit a UK SPAC before completion of any business combination. Any redemption option should specify a predetermined price at which shares will be redeemed.

“The most notable of the changes is the FCA’s new express willingness to engage with applicants during the eligibility and review process ahead of listing, to provide soft comfort that the SPAC is within the FCA guidance,” opines Mr Broadley. “This is a helpful reversal of the consultation-stage position that the FCA would only confirm whether a SPAC met the criteria to avoid suspension once it had identified its target.”

Furthermore, in the event that a SPAC chooses not to meet the criteria for avoiding suspension or cannot do so, it will continue to be subject to the presumption of suspension.

According to the FCA: “SPACs continue to have risks and remain a more complex investment. Investors, particularly individual investors, should carefully consider all available information and risks before deciding whether to invest in a SPAC, regardless of whether a SPAC has structured itself to comply with the FCA’s new rules and guidance.”

Fraser Tennant