Regulators and stock exchange CEOs in Europe and Asia have been watching the US SPAC market, but at home have seen little SPAC activity to date. That is about to change, say Cliff Pearce, Global Head of Capital Markets, and Chris Wong, Commercial Director of Capital Markets in Hong Kong.
Intertrust Group has received a surge in enquiries from seasoned US SPAC issuers looking to target European and Asian assets. London, Luxembourg, Singapore and Hong Kong are likely to be among the beneficiaries.
Reflecting our previous estimates of the untapped opportunities in Europe and Asia, we have identified a number of regulatory changes that could create a cascade effect for special purpose acquisition companies.
For example, the greater scrutiny of US SPAC accounting disclosures by the Securities and Exchange Commission (SEC) has caused concern.
The US accounting and corporate legal community fears warrants may need to be reclassified from equity to liability.
Typically, SPACs are pre-revenue, high-growth companies, so that would mean a movement in the fair value of warrants. If SPACs and their targets are required to file restatements to reflect changes in the terms of warrants to reduce liabilities, it could spook investors. Warrants are often the sweetener.
While this scrutiny could create a bottleneck in the US listing process, that may not be a bad thing. The delays might last for a couple of months given the latest accounting considerations. In the scheme of things, that will not materially impact the SPAC market and a market pause could improve structures to protect institutional and retail investors alike. Upcoming SPAC regimes in Asia are likely to address these concerns, because the SEC statement on accounting treatment for warrants was released while the SPAC consultation process was already underway in Singapore.
According to comments in the financial press by Swiss lender UBS, there could be between 30 and 60 SPAC listings in Europe this year, just one-tenth of the level of US SPAC activity last year.
European regulators are anticipating this. They are looking to require SPAC teams or sponsors to honour exclusivity agreements banning them from talking to other potential targets to pursue a merger agreement.
One regulator already showing signs of caution over SPACs and listings is the AFM, the Dutch financial regulator. It will limit as it sees fit the number of new issuances due to record-breaking trading activity over the past year.
AFM chair Laura van Geest said in the regulator’s 2020 report that exchange activity is seemingly disconnected from the real economy. This could divert Amsterdam’s listing activity to Luxembourg and London.
The UK’s Financial Conduct Authority (FCA) is already considering eliminating the current requirement to suspend the listing in return for enhanced disclosure.
That could mean London has a minimum market capitalisation and a redemption option for investors to provide appropriate investor protection. The FCA aims to introduce the new rules or guidance by June, if not earlier.
SPAC sponsors are already heavily engaged with the FCA and London Stock Exchange, which means all eyes will be on London for a slew of SPACs to come to market just as the new rules become active.
Singapore and Hong Kong are among the bourses also expected to experience a surge in SPACs. We believe Singapore activity will pick up after London. This could be as early as this summer, given the number of tech unicorns in the region and the level of capital ready to be deployed by institutional and retail investors.
Hong Kong regulators, on the other hand, are still partial to traditional IPOs and already have flexible listing criteria enabling pre-revenue companies in certain sectors – such as life sciences and biotech – to list on the main market. They may see SPACs as an unnecessary risk.
With that in mind, they may opt to put investor protections at a level that is on par if not higher than those in place in, say, Singapore. That could especially be the case on the retail side, to curb concerns arising from unrestricted public access to high-risk pre-revenue investments. But at the same time, this could provide the exchange and SPAC targets with a much-needed boost – not just in initial listings, but also in terms of liquidity and diversity.
Until more SPAC success stories materialise, most regulators outside the US will maintain their focus on investor protection, such as the risk of dilution faced by retail investors after the de-SPAC process – especially if additional capital is required to complete the combination process, which is then raised from PIPE investors.
Until SPACs have developed a more consistent track record, they may be best suited to an initial target audience of mostly institutional and sophisticated investors.
To learn more about anticipated activity in key SPAC markets, including London (LSE), Guernsey (TISE), Amsterdam, Luxembourg, Singapore and Hong Kong, read our dedicated reports in our Insights section or follow the links below.