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03 Aug 2021

Changes to the Listing Rules - SPACs


What is a SPAC and what is all the fuss about?

SPAC stands for "special purpose acquisition company" which is a newly incorporated company with no business operations that is formed to raise capital through an IPO with the intention of deploying that capital on acquisitions of businesses. It is also known as a "blank cheque company" or sometimes a "cash shell"1. SPACs are usually established with a management team who have particular experience in a specific sector which the SPAC will target. The value of the SPAC beyond the cash it holds is in the experience and contacts of the management.

Recently, there has been increasing interest in SPACs in the US with record numbers of SPAC listings in 2020 and then again in Q1 2021 (although an SEC statement in April 2021 stipulating new accounting rules has taken the wind out of the sails of this trend).

London has not seen the same boom in SPAC listings and there has been some concern that it has lost business to its competitor financial centres because the Listing Rules have been too restrictive in this area. London has fallen behind not only the US but also some European markets which have looser rules such as Paris and Amsterdam.

In April 2021 the FCA published a consultation setting out proposed amendments to the rules around SPACs looking to list in London. On 27 July the FCA published Policy Statement 21/10 which summarised the feedback in response to the consultation paper and set out final rules and amendments to the FCA's technical note on cash shells. These new rules and guidance will come into force on 10 August 2021. What has changed?

The removal of the presumption of suspension of listing on an acquisition by a SPAC

One of the main restraints on London SPAC listings has been thought to be the presumption that the listing will be suspended when the SPAC announces an acquisition or if there is a leak of a proposed acquisition. The intention was to protect investors from a lack of sufficient public information and consequently impaired price discovery. An acquisition by a SPAC will often be a reverse takeover for the purposes of the Listing Rules such that when it is completed the SPAC's shares will be cancelled and the combined new entity will be required to make a new application for listing. 

The changes to the rules have removed the presumption of suspension for SPACs that meet certain criteria. The FCA states that it has aimed to strengthen protections for investors and set credible standards for issuers while maintaining the smooth operation of the market. It has said it is not aiming to engage in a regulatory race to the bottom.

The FCA considers that the Listing Rules changes will provide an alternative route to market for SPACs that incorporate the prescribed structural features and provide adequate disclosure of key risks to investors. In such cases, the presumption of suspension on announcement of an acquisition will not apply.

What criteria must a SPAC meet to benefit from these changes?

In summary the presumption of suspension will not apply where the SPAC incorporates the following features:

  • a minimum of £100m is raised at IPO;2
  • monies raised are ring-fenced to either fund an acquisition or be returned to shareholders if they redeem their shares or if the SPAC is wound up, less any amounts specifically agreed to be used for the SPAC's costs;
  • a time limit to make an acquisition within two years of IPO, which may be extended by 12 months on shareholder approval, plus an option to extend by six months without a shareholder vote in certain limited circumstances, for example where shareholder approval of the acquisition has been obtained but it has not completed;
  • board approval of a proposed acquisition, excluding any conflicted director;
  • if there is a conflict between a SPAC director and a target, the board must publish a 'fair and reasonable' statement which reflects advice from an appropriately qualified and independent adviser;
  • shareholder approval is required for any proposed acquisition3, with SPAC founders, sponsors and directors barred from voting;
  • an option for investors to exit their shareholding before any acquisition is completed by way of the SPAC redeeming or otherwise purchasing their shares for a pre-determined amount, such option to be exercisable at the discretion of the shareholder prior to completion of the reverse takeover and whether or not they voted in favour of it; and
  • investors must be given sufficient disclosure of key terms and risks from the time of IPO to the conclusion of any acquisition, and there are certain contents requirements for the announcement of the reverse takeover.

The SPAC must give written confirmation to the FCA that the conditions have been met and will continue to be met until the reverse takeover is completed. 

FCA guidance aims for greater certainty

The FCA has modified its supervisory approach such that it may provide more comfort prior to a listing that an issuer is within the guidance on disapplying the presumption of suspension of listing. It expects to work with issuers and their advisers to ensure such comfort is achieved as part of the process of vetting the prospectus and assessing eligibility for listing. It will apply a key principle that where a SPAC meets the above criteria it will generally be treated similarly to commercial companies in terms of the application of MAR and the FCA's general suspension powers. 

The FCA notes that evidence from the US suggests that SPACs have varied returns for investors and can often result in losses. It does not expect all SPACs to structure themselves to comply with these new measures, in which case the presumption of suspension will remain.

What next?

It remains to be seen whether these changes will open the gates to a flood of London SPAC listings. The London IPO market has for obvious reasons been far busier this year than last and investors' diaries are already full with established operating businesses looking to pitch to them for IPOs. The FCA is still consulting on a proposed wider change to the Listing Rules following a review of London's competitiveness by Lord Hill of Oareford. One area that his report highlighted was the need to attract tech start-ups and the changes to the SPAC rules, together with other changes that may flow from Lord Hill's report, may be of particular appeal to such businesses which may not have the track record to go through a traditional route to market.

1 Some cash shells are not technically SPACs, for example where operating businesses have sold all of their operations and are left with cash only. The FCA's policy statement refers to "cash shells" and the amended Listing Rules to "shell companies"

2 This is down from the £200m originally proposed

3 This is a change because most SPACs are listed on the Standard List (because they do not meet the eligibility criteria for the Premium List) where shareholder approval is not necessary for a reverse takeover