The Financial Conduct Authority has changed the rules that govern the listing of Spacs on the London Stock Exchange, finally enabling the UK to compete with US and European stock exchanges.
Spacs have been in high demand abroad, with part of the attraction related to the lighter regulatory route to listing because it does not need an underwriter to determine at what share price the final company will list. Other advantages include potentially raising capital more quickly than through a conventional IPO.
Firms and individuals involved in a Spac should seek counsel from expert advisors and address concerns through careful planning and consideration.
Here’s a quick list of 10 things companies need to know if they’re interested in launching a Spac in the UK.
1: How to list on the LSE?
A Spac lists on the LSE via an IPO, after which an independent third party ringfences investors’ money, a process known as an Escrow arrangement. The Spac then looks to identify a company to acquire within a certain timeframe. The Spac will issue ordinary shares, upon listing, which trade immediately and can issue warrants — which enable holders to acquire additional ordinary shares at a specific rate for a defined time — to investors once an acquisition is identified and completed.
The Spac’s board also approves the acquisition of the target firm, and the proposal must pass a shareholder vote. The SPAC company completes the takeover and the newly enlarged firm typically lists.
2: Within a set timeframe in the UK
The Spac must generally complete the acquisition within two years of the IPO. Shareholders can approve an extension to three years if they consider the deal to be well-advanced.
3: The minimum amount a Spac IPO in the UK can raise is £100m
The Financial Conduct Authority’s minimum capital raising amount for a Spac has been reduced from £200m to £100m, excluding funds provided by a Spac’s founders and sponsors. Sponsors are usually the entity or management team that forms the Spac. The reduction reflects expectations around the anticipated size of UK Spacs and prospective target companies, and should also encourage Spacs to list via the UK.
4: Founders are heavily involved
Founders establish Spac companies and sit on their boards. They also invest nominal capital in exchange for founder and other types of shares and are instrumental in identifying a suitable acquisition target. Having experts with significant experience in a particular sector on the board can be attractive to target companies in that industry.
5: Spac founders may fund some or all the IPO process
In return, founders typically retain between 10-20% of share capital on completion of the IPO. However, they tend not to draw a salary from the new company until the successful completion of the acquisition.
6: Any proposed acquisition requires majority shareholder approval
This means a majority of public shareholders. Spac founders, sponsors and directors cannot participate in the shareholder vote. Spacs can use proxy solicitation firms to gauge support among shareholders for the potential acquisition.
7: Investors unhappy with the target acquisition can redeem their options
Investors dissatisfied with the terms of the target acquisition can exit their investment at the shareholder vote stage via a ‘redemption option’. If shareholders reject a deal, the Spac can seek another deal or return to shareholders with improved terms on the original for approval.
8: There are strict rules about what investors’ money can go towards
Ringfenced money can only go towards acquiring the target company, redeeming shares on behalf of dissatisfied shareholders or paying capital to any remaining investors at the end of the process if no acquisition takes place.
9: Disclosure to investors about the proposed acquisition
These must happen at the appropriate stage of the Spac lifecycle and must include information about the Spac’s structure and strategy, as well as arrangements for the enlarged company after the acquisition. Disclosures must also provide enough information at the time of the initial acquisition announcement.
10: A Spac can raise additional funds
If the founders identify a target but need more money to acquire it, they can take part in a private investment in public equity (PIPE). Alternatively, they can raise additional funds by other means.
Sophie De Freitas is a client relationship director, and Cecilia Williams is a client solutions director, at Computershare