SPAC to Basics (VI): UK Potential

Fred Halbhuber

As this series has explored in depth,[1] SPACs have been met with plenty of investor enthusiasm in the US. And yet, while SPACs listed in the US raised £63.5 billion in 2020, the figure in the UK is a mere£30m.[2] This trend has continued into 2021, with 250 SPAC listings in the US and not a single listing in the UK as of March.[3] In light of this stark difference, this final installment of ‘SPAC to basics’ explores the differences in the US and UK SPAC markets and considers the potential for change going forward. First, it will be explored why the UK SPAC market has not experienced the same growth as that in the US. This will be done by considering both structural differences in the regulatory environment and differences in investor risk appetite. Second, this installment will consider the consequences of a growing SPAC market in Amsterdam on London’s willingness to relax current rules. Finally, current calls for change and proposed amendments to Listing Rules on the LSE will be evaluated.

 

SPAC use in the UK: lack of means or lack of enthusiasm?

While UK SPACs do benefit from the absence of listing requirements like those found in the NASDAQ and NYSE which mandate that at least 90% of SPAC IPO proceeds be held on trust[4] and that the fair market value of SPAC mergers amount to at least 80% of the trust account,[5] a number of important differences in the regulatory environment still make SPACs listed in London less appealing to investors than those listed in New York.

 

First, a SPAC’s acquisition of a target is classified as a “reverse takeover” under the LSE listing rules. As a result, trading in SPAC shares is suspended once a merger is announced pending publication of an FCA-approved prospectus. As Tim Stevens, partner at Allen& Overy, has noted, this restriction is “a killer” in that it precludes determination of the share price “around that point in time [when it] is critical for the ability to conclude a business combination”.[6] Indeed, trading in some UK SPACs which listed in 2017 are still suspended.[7] This locks shareholders unhappy with the proposed target into the deal for an extended period and undermines the pre-merger trading in the secondary market that makesUS SPACs so attractive.[8]

 

Second, in contrast to US SPACs, shareholder approval of the proposed target is not generally required in UK SPACs.[9] This gives shareholders less control over the company which is ultimately acquired. More importantly, shareholders in UK SPACs generally lack the right to redeem for a pro rata share of the trust account.[10] Together with the restrictions on trading in the secondary market following announcement of the merger, absence of a redemption right makes SPAC shares significantly more illiquid. Considering that IPO investors in US SPACs often seek to liquidate their position shortly before or after the merger,[11] the combination of these restrictions means the US model cannot be easily exported to the UK.

 

Third, the absence of a “price pop” phenomenon in the UK makes investing in SPACs less attractive to early investors.Companies frequently underprice their initial offering to generate greater interest in the shares by leaving “free money” for early investors and generating positive media coverage of a price surge. The average size of the pop on the first day of trading between 2000 to 2019 was 14.8% of capital raised.[12] While it has been suggested that the price pop represents less of a problem for SPAC sowing to “more complete data” at the initial offering,[13] companies are still inclined to underprice to create some early excitement about their stock. The cost of this underpricing is borne by the target, which (in theory)could have priced all its shares at the higher “popped” price than the price actually sold at. The benefit, by contrast, is reaped by the investors buying at the pre-pop price, making SPAC shares (at least initially) more attractive. The price pop phenomenon, however, is far less common in the UK. In addition to the longer price discovery process, which results in more precise pricing,[14] the smaller portion of shares listed in the US also contributes to the phenomenon. By limiting supply of shares (often around to around 10% of shares), US-listed companies can create a greater price pop.[15] However, since UK-listed companies are typically required to float at least 25% of shares, this technique is unavailable.[16]

 

Beyond these regulatory differences, less easily quantifiable “cultural” differences in investor risk appetite may explain the disparity in SPAC listings. While concerns over a SPAC bubble have been raised on both sides of the Atlantic, these fears have been voiced more prominently by David Schwimmer, head of the London Stock Exchange, than his counterparts in the US. As recently as March 2021, Schwimmer warned of dangerous “froth” in the US SPAC market and that things could “end poorly” for SPAC investors.[17] A number of prominent UK SPAC failures in recent years have also fed investor skepticism. In 2010, Vallar, which raised £700 million after listing on the LSE, was fined £4.65 million for its breach of listing rules. In 2015, Gloo Networks, a £30 million SPAC, exhausted its capital without finding a single target and liquidated just three years ago. While the successful £1.25 billion listing of the J2 Acquisition SPAC in 2017 may have gone some way in dispelling the negative perception of SPACs in the UK, the low volume of UK SPAC IPOs in recent years suggests there are insufficient “success stories” to overcome the prevailing attitude.

 

Admittedly, the origins of US SPACs in the penny stock market are also tainted by fraud and scandal. However, modern US SPACs have done much to distinguish themselves by voluntarily introducing a number of checks.[18] For example, while SEC Rule 419 (regulating blank check companies issuing penny stock[19]) requires that 90% of IPO proceeds be held on trust, modern SPACs typically hold 100% or more.[20] Similarly, while only shareholders voting against the merger with the proposed target must be offered the right to redeem under NYSE and NASDAQ listing rules, SPACs usually require the right to be extended to all shareholders. Moreover, the passage of time since the US scandals in the 1980s that prompted Congressional and SEC intervention has watered down its influence; by contrast, the UK SPAC failures in the 2010s continue to weigh heavily on large institutional investors.

 

Growing SPAC market in Amsterdam

Amsterdam, not London, has become the main listing location for SPACs in Europe. The first European SPAC of 2021 (ESG CoreInvestments, raising €250 million) was listed in February on Amsterdam’s Euronext stock exchange,[21] with three more SPACs following suit by March.[22] Two large industry names, Bernard Arnault, founder of LVMH, and Jean Pierre Mustier, former head of UniCredit, announced plans in February for a European SPAC to be listed in Amsterdam.[23]

 

A number of factors explain why Amsterdam has been better suited at attracting SPACs than London. First, as Tim Stevens, partner at Allen & Overy, has noted, the ability for investors to exercise redemption rights to redeem their initial investment if they are unhappy with the target company makes these investments less risky than the London alternative.[24] Second, while the classification of SPAC acquisitions in London as “reverse takeovers” suspends trading until publication of a prospectus, no such restriction applies on the Euronext exchange. Finally, the development of the SPAC craze in Europe is occurring at the same time as businesses are leaving London followingBrexit; the relative growth of Amsterdam as an international financial center makes the Dutch capital better placed to handle large SPAC IPOs.

 

Attracting opportunities?

In the wake of Brexit, the UK government has become increasingly concerned about competition from New York and otherEuropean capitals. These concerns are not unfounded. In January, Amsterdam replaced London as Europe’s biggest share trading venue and movement of business to the US has dented London’s dominance in euro-denominated interest rate swaps.[25] UK-based companies have also elected to list in New York in order to enjoy the benefits of the SPAC route to the public market. For example, UK-based Arrival, an electric bus maker, listed on the NASDAQ in March by merging with CIIC MergerCorp.[26]

 

A number of proposals have therefore been put forward by the FCA to encourage the growth of the SPAC market in the UK. Most importantly, the FCA recommends removing the Listing Rules requirement that trading in SPAC shares is suspended upon announcement of the merger if the SPAC complies with additional requirements. These other requirements include, among others,[27] (i) a minimum size threshold of £200 million,[28] (ii) a ring-fencing of capital raised from public markets in the IPO, (iii) a two-year maximum time limit for making an acquisition, (iv) shareholder approval for proposed acquisitions and (v) a redemption right for shareholders at a fixed amount or a pro rata share of the ring-fenced capital. The intention behind these requirements is to provide greater investor protection to partially compensate for the withdrawal of the suspension rule: the minimum size threshold encourages greater involvement from institutional investors and thereby promotes more exacting due diligence; ring-fencing of funds protects investors from misappropriation of funds;[29] the time limit for acquisition ensures investor capital is not locked away for too long and encourages active search for a target;[30] the shareholder approval requirement ensures that shareholders are satisfied with the proposed target; and the redemption right for shareholders ensures that those unhappy with the target are not forced into the deal. Those readers familiar with requirements in the US will have realised just how similar these proposals are to the listing rules for SPACs on the NASDAQ and NYSE. In short, therefore, compliance with the FCA’s proposed additional requirements to avoid suspension in trading would bring the LSE listing rules very much in line with current practice in the US.

 

These recommendations follow other more general recommendations by the UK Listing Review[31] that would reduce the free float requirement to 15% (more in line with US practice of floating 10%) and make the IPO “pop” more possible in the UK.[32]

 

Importantly, however, if the US-UK differences in SPAC listings are also attributable to investor risk appetite and concerns over recent UK SPAC failures, then loosening regulatory controls may not be sufficient to place London on an equal footing with New York or Amsterdam. Only after witnessing the success of domestic SPACs will UK investors be ready to fully embrace this alternative method of going public.

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[1] In particular, see ‘SPAC to basics (II): investor perspective’.

[2] Jasper Jolly, “Will Spacs, the new trend in buyouts, takeoff in the UK?”, The Guardian, 6 March, 2021, available at: https://www.theguardian.com/business/2021/mar/06/will-spacs-new-stars-of-corporate-finance-take-off-in-the-uk.

[3] Hannah Skingle, “UK SPACs: Is the Stateside Frenzy Heading our Way?”, Beauhurst, 18 March, 2021, available at: https://www.beauhurst.com/blog/uk-spacs-stateside-frenzy-heading-our-way/.

[4] NASDAQ Rule IM-5101-2(b); NYSE Listed Company ManualSection 102.06.

[5] NASDAQ Rule IM-5101-2(b); NYSE Listed Company ManualSection 102.06.

[6] Nikou Asgari and Stephen Morris, “European bankers set sights on Amsterdam as regional Spac capital”, Financial Times, 17 February2021, available at: https://www.ft.com/content/240293a8-20ed-4cf3-a5ec-63dc1c2d9076.

[7] “The outlook for SPACs in the UK”, Business Sale Report,2021, available at:https://www.business-sale.com/insights/industry-insights/the-outlook-for-spacs-in-the-uk-220974.

[8] See further ‘SPAC to basics (II): investor perspective’.

[9] Thomas Vita, Fiona Millington and Kevin Connolly, “SPACs:The London alternative”, Norton Rose Fulbright, October 2020, available at: https://www.nortonrosefulbright.com/en-nl/knowledge/publications/94734f5e/spacs-the-london-alternative#section5.

[10] See further ‘SPAC to basics (I): structure and timeline’.

[11] Discussed at length in ‘SPAC to basics (II): investor perspective’.

[12] Klausner and Ohlrogge, “A Sober Look at SPACs”, StanfordLaw School, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3720919.

[13] Spencer Rascoff, “What are the costs of going public, and how do SPACs stack up? Part 1: Money (the obvious cost)”, 14 December 2020, available at: https://www.linkedin.com/pulse/what-costs-going-public-how-do-spacs-stack-up-part-1-money-rascoff/.

[14] “The outlook for SPACs in the UK”, Business Sale Report,2021, available at: https://www.business-sale.com/insights/industry-insights/the-outlook-for-spacs-in-the-uk-220974.

[15] Leah Hodgson, “SPAC backers' bid to spread craze to UK faces hurdles”, 20 October 2020, available at: https://pitchbook.com/news/articles/spac-IPOs-london-stock-exchange-sluggish.

[16] Ibid.

[17] Jasper Jolly, “Will Spacs, the new trend in buyouts, takeoff in the UK?”, The Guardian, 6 March, 2021, available at: https://www.theguardian.com/business/2021/mar/06/will-spacs-new-stars-of-corporate-finance-take-off-in-the-uk;Ortenca Aliaj and Aziza Kasumov, “Spac boom eclipses 2020 fundraising record in single quarter”, Financial Times, 17 March, 2021, available at: https://www.ft.com/content/321400c1-9c4d-40ac-b464-3a64c1c4ca80.

[18] For more detail, see ‘SPAC to basics (V): calls for reform’.

[19] § 230.419(a)(2)(i) and (ii).

[20] Ramey Layne and Brenda Lenahan, “Special Purpose Acquisition Companies: An Introduction”, Harvard Law School Forum on CorporateGovernance, 6 July, 2018, available at: https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-introduction/. See also David N. Feldman, “Reverse Mergers: Taking a Company Public without anIPO”, Bloomberg Press, 2006, at 187.

[21] Nikou Asgari and Stephen Morris, “European bankers set sights on Amsterdam as regional Spac capital”, Financial Times, 17 February 2021, available at: https://www.ft.com/content/240293a8-20ed-4cf3-a5ec-63dc1c2d9076.

[22] Intertrust Group, “Amsterdam gears up for SPAC boom”, 11 March 2021, available at: https://www.intertrustgroup.com/insights/amsterdam-gears-up-for-spac-boom/.

[23] Stephen Morris, “Arnault and Mustier join the $100bn Spac boom”, Financial Times, 15 February 2021, available at: https://www.ft.com/content/f523768d-41af-492c-95b0-ff5d23a30539.

[24] Nikou Asgari and Stephen Morris, “European bankers set sights on Amsterdam as regional Spac capital”, Financial Times, 17 February2021, available at: https://www.ft.com/content/240293a8-20ed-4cf3-a5ec-63dc1c2d9076.

[25] Adrian Croft, “Two age-old European trading rivals are at loggerheads again—this time over SPACs”, 4 March 2021, available at: https://fortune.com/2021/03/04/brexit-europe-finance-london-amsterdam-spacs-financial-center-eu/.

[26] Ryan Browne, “British electric vehicle firm Arrival sinks in SPAC debut”, CNBC, 25 March 2021, available at: https://www.cnbc.com/2021/03/25/british-ev-firm-arrival-arvl-goes-public-via-spac-today.html.

[27] For the full consultation, see CP21/10: Investor protection measures for special purpose acquisition companies: Proposed changes to the Listing Rules, available at: https://www.fca.org.uk/publications/consultation-papers/cp21-10-investor-protection-measures-special-purpose-acquisition-companies-proposed-changes-listing.

[28] Excluding capital provided directly by the SPAC sponsor.

[29] See the similar concerns for blank check companies in theUS in the 1980s: ‘SPAC to basics (V): calls for reform’.

[30] See the aforementioned issue with Gloo Networks in 2015which failed to find a target.

[31] For more detailed discussion see Norton Rose Fulbright, “UKListing Review: A hill to climb?”, 17 March 2021, available at: https://www.nortonrosefulbright.com/en/knowledge/webinars/911b1041/uk-listing-review-a-hill-to-climb.

[32] See discussion of the “price pop” above.