What are SPACs?
A special-purpose acquisition company (SPAC) is a shell company that seeks to raise funds through investors instead of through the stock exchange. Once enough capital is raised, they will acquire another privately owned company. The benefit of this is that it allows a company to become publicly listed without market risks. It also accommodates bigger investments that initial public offerings (IPO) cannot provide. As SPACs do not conduct any material business, there are also no unexpected liabilities, giving them the potential to be a more desirable method to conduct deals. Importantly, SPAC management teams, also known as sponsors, must complete the acquisition within two years or the funds must be returned to investors. This creates protection for the investors and promotes business efficiency.
The development of SPACs
SPACs, which were first created in the early 1990s, were originally thought to be a poor method of funding and approaching an acquisition. This was partly because of the uncertainty surrounding safety for investors and whether investing in a future acquisition carried too much risk. Despite this, over the past five years, over 50 SPACs have been listed in the UK, with over $2 billion being raised by them on the London Stock Exchange. The end of the UK’s financial crisis also saw a surge in SPACs where sponsors sought alternative sources of capital that was unavailable in the private markets. Overseas, some of the top performing SPACs in 2020 have provided high returns since their offer date. Live Oak Acquisition Corp, who announced a business combination with biopolymer manufacturer Danimer Scientific, gained 171% in value since its announcement.
The development of SPACs has also seen high levels of celebrity involvement, specifically celebrities becoming creators and investors of the companies. Many athletes, such as NBA star Shaquille O’Neal who became an advisor in the Forest Road Acquisition Corp, have become more involved since SPACs have taken off. With some of the top SPACs giving returns of over 150%, it is not surprising that individuals want to get involved in the financial markets. Besides this, the Securities and Exchange Commission (SEC) has warned against investing in a SPAC because of celebrity involvement. The agency has made it clear that ‘celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss’. The development of SPACs have certainly caught the attention of many individuals and, if this continues, could boost the number of investors in the future.
Regulations
Despite the several advantages of SPACs, in the US, the SEC has created regulatory barriers which must be overcome. The typical grace periods for many areas of regulatory compliance are less easily granted, for example, SPACs are not given the one-year annual grace period for internal control compliance integration for the acquired entity. This is challenging as the process of complying with these regulations can take months to plan for and can create pressure for sponsors and investors.
More recently in the UK, the Financial Conduct Authority (FCA) has launched a consultation on proposed changes for its listing rules for SPACs. Some of these proposals include the requirement for a minimum of £200 million to be raised when a SPAC’s shares are initially listed and a ‘redemption option’ to allow investors to withdraw before any acquisition is completed. The FCA’s proposals appear to be focused on creating certainty and protecting investors. This may be because of evidence from the US markets which show SPACs’ ability to lead to high losses. The regulations will ultimately lead to more work for the shell company, but in the long-term, could prove beneficial for stability.
Looking towards the future
Within the first two months of 2021, SPACs raised $58 billion in 188 IPOs, signifying rapid growth for the future. The pandemic however has caused problems; volatility levels have been raised making IPOs riskier. Despite this, high-profile SPACs have shown investors that SPACs may actually be the safer investment choice during uncertain times, such as throughout the Covid-19 pandemic. This may mean that investments in SPACs increase over the next few years as they can provide more security.
This new view may create a promising space for SPACs in the UK. Although some reluctance still exists, there appears to be a consensus that transparency will be key to facilitating SPACs and protecting investors. It has also been stressed that ‘some of these [SPACs] will succeed and some will fail’, signaling that there is no guarantee of success for every future SPAC.
The new regulation proposals from the FCA may have a great impact on the appeal of SPACs in the UK and this, alongside Brexit concerns and the UK’s position in the global financial market, causes great uncertainty as to whether they will match the success in the US. It is also predicted that if UK SPAC regulations are not addressed, then many private companies will choose to migrate jurisdictions; causing a detriment to the UK economy.
Conclusively, despite the potential for SPACs to take off in the UK, it is unlikely that we will see the same rapid growth that occurred in the US. This is because of the inconclusive regulations, but mainly because the UK public market investors do not look favourably upon SPACs; they are unreliable and unstable.
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