Before 2020, the term ‘SPACs’ was relatively unknown. Special Purpose Acquisition Companies have, however, quickly become part of the business vernacular.
During last year, there was an incredible $80 billion raised by 240 SPACs, and when you compare that to a paltry 59 offerings in 2019, one can clearly see the potential for further growth.
Certainly, in 2021 and also in 2022, it will be intriguing to see how much more popular they become in the US, and also on the London exchange.
Perhaps we’ll see a lot of “De-SPAC ing” (a business combination where IPO funds will be deployed), or maybe there will be large-scale redemptions if it turns out that the hunt for target companies remains unsuccessful.
Money raised from an IPO has to be invested between 18 and 24 months after funds have been received. That means, by their very nature, a SPACs shelf-life is limited.
The SPAC is only formed to look for a target company to obtain, and if this isn’t achievable within the time frame, IPO funds will be depleted and the SPAC will face redemptions from its shareholders.
Oddly enough, many SPACs get formed with no real focus on specific industries. The sponsor may have his/her business roots in a particular sector and, to that end, their expertise may dictate to which sector the SPAC is eventually formed.
There is a trend emerging, however, from those SPACs that do indicate a preference for a specific industry.
Technology companies; pharma/medtech, biotech, electric vehicles and cleantech, industrial and government tech and fintech, have all proved popular since January 2020, along with health care, energy, life science, financial and consumer services.
It’s also worth noting that:
there are six key differences between US and UK SPACs
When talking about the rights of shareholders at the time of the initial acquisition, there is a significant difference between UK and US SPACS.
For example, there is no shareholder approval required in the UK, when related to a Standard listed issuer.
That differs quite dramatically for the US, where approval for the acquisition must be sought. In so doing, one also has to fill out a proxy statement with the SEC.
With the subsequent delay – often as much as three months, possibly more – there becomes a risk of not being able to execute the deal, which clearly makes the US SPAC a less attractive proposition.
Where there is reduced execution risk, as with a Standard listed SPAC acquisition because no shareholder approval is needed, the deal can be closed quicker. An FCA approved prospectus will be required later.
One of the major reasons for not investing in a UK SPAC, despite what first appears to be an attractive investment is the suspension of trading in the SPAC’s shares.
This is because it’s classified as a reverse takeover under the listing rules, and the suspension stays in place once the acquisition has been announced and until an FCA-approved prospectus is published.
What this means for investors is they are potentially locked into a deal that they don’t necessarily support for long periods.
Difference #2: Redemption rights
When shareholder votes are sought in the US, under NASDAQ and NYSE rules, only those who have voted against any acquisition are afforded the possibility of redeeming their shares.
That said, all shareholders should be made the same offer, given that corporate governance documents normally require the same.
The UK shareholder isn’t typically give a chance to redeem, meaning his/her US counterpart potentially has the luxury of redemption for the life of the SPAC or for a pro rata portion of the trust account, the latter coming at the closing of the acquisition.
It’s important to understand that even if a shareholder wishes to redeem, he/she can still retain the warrants.
What that means in practical terms is that investors have more flexibility and control, and they retain any potential upsides relating to the acquisition.
Difference #3: Proceeds Raised
Strict investment criteria is applied in the US, be that under NASDAQ or NYSE rules.
Both note that a trust account must be opened, and 90 per cent of the gross proceeds raised during the IPO have to be deposited into the trust account immediately.
Furthermore, in amongst a raft of other US-centric requirements, when the initial business combinations are finalised – which must be done in the period specified in the prospectus – they must have a fair market value equal to at least 80 per cent of the trust account.
Compare that to the UK where there are no such requirements. Therefore, as a result, there is much more autonomy for identification of a target (or targets) for the directors of a UK SPAC.
There is also much more flexibility in how funds can be used in the short-term, albeit, there is a fiduciary duty on the directors.
They must be seen to deploy the funds always in the best interests of the company, and in line with the manner previously disclosed in the IPO prospectus/AIM admission document.
Difference #4: Legal And Tax Considerations
Where UK SPACs differ in terms of the legal and tax considerations, is that they will almost certainly issue founder preferred shares, as well as warrants for additional founder preferred shares.
That’s in contrast to the capital structure in the US.
The difference can be found in that US SPACs will issue privately placed founder warrants as well as founder shares (for nominal consideration).
Difference #5: Underwriting Fee
In the UK when it comes to the underwriting fee for a SPAC or any other IPO, there is very little difference.
So much so, that the structure for underwriting fee is virtually indistinguishable.
In the US, part of the fee is paid when the IPO closes, with the rest deferred until the closing of the initial acquisition.
Difference #6 – Regulatory Requirements
AIM listed or Standard companies in the UK don’t have anything like the regulatory requirements that the US SPACs do.
Public listed companies in the US need to ensure filing requirements are attended to periodically and annually as a start point. Added to that is the need for ongoing listing requirements to be met.
The burden on US SPACs, therefore, weighs heavier.
That said, even those SPACs that have an industry focus usually include general language allowing investment in other areas if necessary.
This trend toward technology and early-stage companies makes sense, as they are often in need of substantial capital. The best-positioned companies to take advantage of the unique combination of features that a SPAC offers are those that need both a large influx of capital and access to liquidity.
One may expect that companies with a long operating history and substantial positive historical earnings may be less likely to pursue the SPAC path versus a traditional IPO. However, the sheer volume of SPACs that are hunting for targets means that sales processes that might otherwise be focused on private acquisitions by strategic or private equity buyers will suddenly find SPACs at the bidding table ready to make offers.
A Litte Less Talk, a Little More Action in London?
The announcement that U.K. zero-emission vehicle maker Arrival Group is to merge with NASDAQ-listed CIIG is evidence that some of the recently-minted U.S. SPACs are also targeting businesses outside of the country.
However, an unanswered question repeatedly asked in 2020 is whether the interest in listing SPACs will again migrate to London in 2021.
Looking at the last wave of SPACs that listed on the London Stock Exchange in 2016-17, LSE standard segment-listed SPACs have features that make them more or less attractive to their various stakeholders.
The most significant difference between New York and London-listed SPACs are the rights of shareholders at the time of the De-SPACing transaction.
In the U.S., shareholder approval of the acquisition is usually required, which is not the case in the U.K.
This process, which typically requires the preparation of a proxy statement, can take three months or more to complete from the date of the agreement of the acquisition.
Additionally, shareholders of a U.S. SPAC typically have the right to redeem their shares of common stock at the time of the closing of the acquisition.
A shareholder that has opted to redeem their shares may retain their warrants, thus retaining some upside potential associated with the acquisition. Often, the acquisition agreement includes a condition precedent that a specified amount of cash must remain after the SPAC satisfies all redemption requests.
These features provide investors in U.S. SPACs with more control and flexibility; by contrast, the lack of these features makes London SPACs less attractive to investors.
However, the absence of the associated protracted timetable and the reduced execution risk arguably make a U.K. SPAC a more attractive bidder in the eyes of the target and more competitive in relation to private equity buyers.
Moreover, due to the classification of the London-listed SPAC’s initial acquisition as a “reverse takeover” under the LSE’s listing rules, the acquisition results in a suspension of trading in the SPAC’s securities from the time of announcement until an FCA-approved prospectus relating to the enlarged business is published.
This locks disapproving investors into an acquisition they do not support for a protracted period and is another commonly-cited reason for not investing in U.K. SPACs.
On balance, these features, along with the relative size of the two markets, will likely mean that, while the London market will remain an alternative listing-venue for SPACs, it will remain viable for only the most mature and trusted sponsors.