The regulator may have shown its hand, but the UK market is still waiting for a Spac boom to materialise in the City.
One of the key rules that may have prevented Spacs in the UK from reaching the soaring heights of the Spac boom in the US was the requirement to suspend trading once an acquisition target was announced, resulting in a nervy holding period for backers.
The point at which shareholders have the opportunity to decide whether they like the proposed acquisition could have also been the point at which they temporarily lose the ability to pull out. By the time trading recommences, the opportunity to sell at a profit may have been missed if the wider market turns against the acquisition.
New rules introduced on 10 August were supposed to solve this issue. However, while the presumption of suspension has now been removed for Spacs meeting certain investor protection requirements, the UK market remains plagued by uncertainty.
The FCA’s paper announcing the changes lists 14 groups that responded to the regulator’s call for input on how it should proceed, ranging from investment managers and law firms to trade bodies and technology companies.
City firms warned the FCA that, as its proposals stood, they would still not receive sufficient clarity to invest.
By the time the regulator made its final ruling, several of the concerns flagged by the 14 groups had still not been addressed.
All of the respondents quoted below were given the opportunity to update their views for this article, but none chose to weigh in on the consequences of the regulator’s eventual decision, suggesting that many still do not think investors have the reassurances they need from the Spac market.
Institute of Chartered Accountants in England and Wales
One of the key points from the accounting sector was that, if the FCA proceeded as planned, Spac investors would still not be clear enough about whether or not their shares would end up being locked away.
“Uncertainty for investors remains as, even if the proposed conditions have been met by the Spac, the FCA may still decide not to waive the presumption of suspension of trading when a potential acquisition target is identified,” it wrote. “Has the FCA considered providing confirmation in advance of admission — at the time of the listing application — that conditions are satisfied and it will not suspend trading?”
The FCA wrote in its policy paper:
“We will work with issuers and their advisers to ensure that such comfort is achieved as part of vetting the prospectus and assessing eligibility for listing. At the same time issuers will need to be mindful that such comfort will not endure in the event that circumstances/arrangements have changed or have not been accurately described,” it added, leaving the possibility that shares could still be suspended with little notice, and that it would not give a firm ruling before listing that no suspension would be required.
What else would have helped investor appetite for UK Spacs? The ICAEW suggested that Spac boards and sponsors should be forced to give reassurances they have enough resources to cover running costs and thoroughly assess potential acquisitions – another proposal that did not make the FCA’s cut.
As the ICAEW notes, the FCA is “circumspect about any increase in demand resulting from proposed changes to the listing rules for Spacs – either from investors for such opportunities or from private companies for this alternative route to public markets.”
UK Finance, Association for Financial Markets in Europe
In a joint submission assisted by law firm Linklaters, the two trade bodies mirrored ICAEW’s views that the risk of suspension would still weigh on investors. It “should not be necessary to get approval from the FCA that no suspension will be required,” they wrote, adding that without a clear path to stopping a temporary suspension, the rules “will continue to make London a significantly less attractive market for Spac listings”.
“It is critical to investors at the outset that there is no realistic risk of suspension. This is the basis on which the Spac market has been established in the US and in other European markets.”
The trade bodies also threw up yet more uncertainties around the UK Spac regime, specifically with regard to how the vehicles should be classified under existing fund regulations.
“It would be helpful if the FCA were to confirm the market understanding that a Spac should not need to be treated as an alternative investment fund under the Alternative Investment Fund Managers Directive,” they wrote. “It would also be helpful if the FCA could acknowledge that, while the initial distribution of shares and warrants in a Spac will be likely to be limited to institutional investors for the purposes of Priips, it is nonetheless acceptable for the product to be approved under MiFID II product governance rules as being suitable for a retail target market in light of the availability of the securities to retail investors in the secondary market.”
Meanwhile, concerns were also raised about the competitiveness of the UK market should the FCA plough ahead with plans to prevent Spac founders, sponsors and directors from voting, and the need to produce ‘fair and reasonable’ statements around conflicts of interest – both of which the FCA carried through into its final rules.
“The exclusion of the sponsor from voting, would be damaging to London listed Spacs seeking to conclude acquisitions where the actual or perceived risk of a vote failing without the support of the sponsor may be a material consideration and, as a consequence, we believe will make UK Spacs less competitive in sales processes versus other European Spacs which do not currently face this limitation,” the submission read.
“Moreover, we believe that this feature would make London less attractive for potential issuers versus other European markets where sponsors are able to vote on the acquisition… if investors felt that the general exclusion of the sponsor from voting was important, it would have appeared as a feature in US and European Spac transactions.”
As for fair and reasonable statements? These would be a “disproportionate further procedural step”, they bodies wrote, that would be “out of line” with EU and US practice.
Based on discussions with its members, the IA also waded in to say that “the FCA’s supervisory approach will not give Spac sponsors or investors sufficient confidence that it will not suspend the Spac’s listing.”
“Investment managers are reluctant to enter into investments where there is significant uncertainty on whether the shares will be suspended and therefore whether they can sell their clients’ holdings,” it said. “Unless there is clarity on the likelihood of suspension it is unlikely that Spacs will attract a sufficient level of institutional money to meet the aims of market integrity.”
The FCA was always fighting an uphill battle with major investment managers though. The lack of interest from institutional money in the UK market will be a tough nut to crack, as the IA notes, given that if they wanted to invest at IPO stage, managers would not be able to conduct full due diligence on the target company, and would essentially have to entrust the Spac with investment decisions they normally carry out themselves.”
“It is important to note that resolving these concerns may not result in a significant increase in investment appetite for Spac structures, considering the inherent concerns investment managers have about delegating their capital allocation responsibilities to a third party,” the IA’s input reads.
While investment platform Hargreaves Lansdown was listed as a non-confidential respondent to the FCA’s consultation, it declined to share its input with Financial News. But a spokesman noted the lack of information about acquisition targets that Spacs provide, and that there “often isn’t enough information available for investors to make well-informed decisions”.
The FCA’s rules do go some way to addressing this issue; the presumption that trading is not suspended relies on investors being given “sufficient” disclosures on key terms and risks from IPO stage.
However, the FCA has not introduced standardised disclosures akin to the US listings model, or mandating specific disclosures over and above existing prospectus rules because these would “involve legislative amendments that are a matter for the Treasury.”
To contact the author of this story with feedback or news, email Justin Cash