Despite no longer being in office, Donald Trump continues to make headlines, with his new business, the Trump Media and Technology Group, and plans to go public via a Special Purpose Acquisition Company (SPAC), albeit in the US. In line with the Financial Conduct Authority’s recent developments regulating SPACs, I hope to explain what SPACs are, what effect the regulations have, and how the FCA’s regulations will impact the United Kingdom.

 

What is a SPAC?

Traditionally, a company seeking to go public would need to undergo an Initial Public Offering (IPO). An IPO is costly, and the regulations governing an IPO are arduous. A Special Purpose Acquisition Company, is a body corporate with the specific intent of helping a private company become public “through the back door”. 

 

A SPAC is itself a shell company that is publicly listed on any stock exchange. It then seeks to acquire or merge with private limited companies through a usual buy out. This incorporation of that private company into the SPAC means that, by virtue of the purchaser being a public company, the private company has now become public as well. 

 

To clarify, this means the SPAC itself goes through an IPO, where investors buy shares in the SPAC, although they do not know what companies the SPAC plans to acquire. The SPAC then has a limited window of time to acquire other companies, or it will be shut down.

 

This process is markedly shorter, cheaper, and relatively less regulated than a traditional IPO. A possible reason for its popularity is the impact of Covid-19. With a shorter process, the traditional volatility and uncertainty of the market may have contributed to companies seeking an alternative route to going public.

 

What are the FCA regulations, why were they introduced, and what could they accomplish?

 

The new FCA regulations are very topical, having come into effect on 10th August 2021. These regulations were focused on retail investor safeguards. These regulations are highly technical, and I shall try to summarise some key regulations as best as I can.

 

Firstly, SPACs have an option to extend its operating window, which has been increased to 2 years with an additional 6 months without shareholder approval, or 3 years if the shareholders approve a 12 month extension. 

 

This operating window - I believe - makes little difference to the operation of the SPAC. More likely, this is to create shareholder confidence, as upon expiration of this clear window, monies are to be returned to investors (who bought shares in the SPAC during its own IPO). Further, this aids the FCA’s policy interests in disallowing SPACs to “persist on public markets”. In light of the increasing regulation of industries such as Tech and Banking (think Lloyd v Google and the replacement of LIBOR with SONIA), this regulation may have been implemented as a policy wide raft of regulations to increase investor confidence in the London Stock Exchange (LSE). The opinion that there is an overarching objective of improving confidence in the LSE is also seen in the latest FCA listing rules that encourage “innovative companies” to list on the LSE, and it seems possible that SPAC regulations are serving this purpose too.

 

Secondly, SPAC proceeds have been ring-fenced. This means that the money that public shareholders invest when buying into the SPAC’s own IPO is ‘protected’. This is done through having the money held by an independent third party, for example, through escrow or trust. This prevents managers from using investor money from most things except funding the SPAC transaction. 

 

This ring-fencing explicitly seeks to protect investors, perhaps recognising the potentiality for SPACs to be abused by management in incurring excessive running costs. It may also facilitate transparency, since the ring-fenced amount can only be used to fund: i) an acquisition, ii) redemption of shares from shareholders, iii) repayment of capital to public shareholders if the SPAC winds up (goes into insolvent liquidation) or fails to find a target or complete the acquisition within the time limit. Because of these clear guidelines, it provides certainty for investors, perhaps in holding managers liable. 

 

Thirdly, a £100m “initial capital raising”. Initial capital raising simply means that the SPAC needs to have raised that amount on its initial listing from public shareholders. This means any input from founders, sponsors and directors does not count towards the initial capital raising. 

 

This amount was reduced from the original proposal of £200m, but the FCA believes this will still be enough to attract institutional investors (hedge funds, pension funds, investment banks). This is instrumental, as the FCA sees the attraction of institutional investors as a “light touch” method of regulating managers of SPACs. This method is seen generally in directors duties that the reader may be familiar with from Company law or Insolvency law, and propounds the same theory of seeking to regulate directors lightly. That may or may not be sufficient to regulate SPACs, but will remain to be seen.

 

How will they affect the UK?

I suggest a possible effect of these new SPAC regulations in the UK. These will add momentum to investor (both retail and investor) confidence in the London Stock Exchange. Secondly, it aims to show to the world that the LSE is capable of being flexible, and therefore, an attractive option for private companies to list in.

 

The LSE has had a poor outing of late, with the failure of CurveGlobal Markets (a derivatives exchange) and increased competition from the rest of the world. For instance, throughout the pandemic, life sciences firms have preferred to list on NASDAQ, because it offers more liquidity, a better valuation, and a higher profile for drug sales. Similarly, in the global economic uptake, South East Asia has seen record tech company activity, something not seen in the UK.

 

The LSE needs to combat this, and I believe that the SPAC regulations, in addition to a few others I will mention, will allow the UK to compete more effectively. The new regulations seen from the FCA have centred around stability and security of investors, which in turn, encourage companies to list. Other developments that suggest this trend is the FCA warning consumers of cryptocurrency exchanges, and introducing dual class shares as a means to incentivise tech companies to list in the UK. Taken cumulatively, FCA regulations may help the LSE remain competitive. This will be essential as the UK’s economy continues to be affected by forces such as a resurgent Covid, Brexit, and political dissonance.

 

Conclusion

This article ought to have introduced what a SPAC is, explained some of the regulations and their effects, and lastly, an overview of how FCA regulations may affect the UK.

 

In conclusion, SPACs are highly relevant, and will continue to affect commercial decisions globally. It is an important area of knowledge for future commercial lawyers, as the regulatory, corporate governance, and general corporate areas of law are likely to impact commercial clients.

 

As a postscript, this topic is complicated, and the article is limited in its scope. I have tried to give an overview and some personal commentary, but does not come close to encapsulating the full regulations. That said, I hope this might be an interesting point to raise in an interview, and if you would like to discuss SPACs further, I hope you do reach out to me.