London FCA brings in new SPAC rules to attract more targets and sponsors

The long-awaited regulation changes for London SPACs are set to boost activity in the city

New regulations governing Special Purpose Acquisition Companies (SPACs) in London will create a progressive package that is arguably more competitive and price sensitive than that in the US and other listing hotspots.

With the new regulations in play as of 10 August 2021, we may see a stream of new London SPACs listings, with sponsors switching from bottlenecked markets such as Amsterdam or Luxembourg.

The Financial Conduct Authority (FCA) guidelines manage to protect investors without being too prescriptive, through redemption options that can be laid out in the prospectus. These give investors greater flexibility if they want to get out of a prospective acquisition or an incoming Private into Public Equity (PIPE) investor’s agenda that they are uncomfortable with.

What’s behind London FCA SPACs regulation changes?

The FCA says that the changes – which have been the subject of consultations since April 2021 – are designed to provide an alternative approach for SPACs that must otherwise give the market detailed information about a proposed target to avoid being suspended.

SPAC sponsors will have to provide additional investor safeguards including:

• A redemption option, which will allow investors to exit a SPAC before any acquisition is completed
• Money raised from public shareholders to be ring-fenced by a third party (this is where Intertrust Group’s Escrow and Settlement Services can help)
• Shareholder approval for any proposed acquisition
• A time limit on a SPAC’s operating period if no acquisition is completed
• Declaring board members’ interests in a SPACs target to avoid conflicts of interest.

SPAC issuers who cannot or choose not to meet the conditions will still be subject to a presumption of suspension.

New London SPACs guidelines: what’s new?

After the consultation, the FCA changed its original proposals:

• The minimum amount a SPAC must raise at initial listing was lowered from £200m to £100m.
• A new option was introduced to extend the proposed two-year operating period limit (three years if shareholders approved an extension) by six months, without shareholder approval. This will only be available in limited circumstances, to provide more time for a SPAC to conclude a deal where a transaction is well advanced.

Reducing the target listing requirement from £200m to £100m opens up the number of possible targets, making London considerably more competitive than Nasdaq, for instance. The minimum listing requirements for SPAC Nasdaq listings are targets with an average valuation/market cap of $550m (capitalisation with cash flow) or $850m (capitalisation with revenue).

Sponsors set on listing in the US have found a decreasing number of attractive targets can realistically be priced at such valuations. There has already been much discussion about US sponsors finding themselves pressured to acquire a company just to complete a trade.

Will new London SPACs rules prove attractive?

The longer timeframe in London raises the chances of finding a target, but questions remain over how long investors will wait. Three and a half years seems a long time to sit tight for any return, although it may fit a patient capital horizon.

We are unlikely to see much significant positive trading activity or value being realised through the secondary market in that timeframe. It will be interesting to see which sectors are preferred and show most promise after the de-SPAC period.

For the most part, the FCA has shown itself willing to give the emerging SPAC market a fighting chance of success by eliminating problem areas witnessed in other markets, such as celebrity-endorsed SPACs in the US.

London has a clear motive – to sustain its long-term viability – for making sure institutional investors are more likely to become involved in the SPAC market. Without institutional investors it has previously been hard for the London Stock Exchange (LSE) or the FCA to ensure retail investors remain protected.

The redemption of the predetermined price in the prospectus has obvious benefits. Sponsors, private market, institutional and, increasingly, savvy retail investors are likely to welcome the new London SPACs rules.

Time will tell just how sustainable SPACs actually are. But as more formidable players start to have a greater influence on the calibre of targets coming to market – for example when private equity portfolios exit via a SPAC – we could see greater institutionalisation of this burgeoning asset class.

Why Intertrust Group?

• Experienced European escrow team handling SPACs, TISE listing and SPV reporting
• Authorised and independent Alternative Investment Fund Manager (AIFM) providing regulatory compliant solutions to EU and non-EU managers
• Licensed by Central Bank of Ireland (CBI) and Commission de Surveillance de Secteur Financier (CSSF) in Luxembourg, to ensure fund activities are compliant with AIFM Directive and SFDR
• Expertise in all private capital asset classes
• Specialised teams on the ground providing risk management, portfolio management, legal matters, compliance and fully integrated fund services
• Automated and standardised accounting, bookkeeping, financial reporting and consolidation
• Monthly, quarterly and annual financial statements in line with relevant accounting standards (such as local GAAP, US GAAP and IFRS) in the US and in major markets · 24/7 IRIS client portal for your portfolio of Intertrust Group administered legal entities