Changes to SPACs regulation will impact European tech M&A

SPACs offer a quick way for companies to ‘go public’ and access fresh investment to help them grow. They have been especially popular in the US for years, but the Covid-19 pandemic has driven renewed interest in their use in Europe, particularly in financial centres such as Amsterdam, Frankfurt and Luxembourg.

However, as Pinsent Masons and partner firms in its European network explain, regulatory barriers have stalled the use of SPACs across much of Europe to-date. That is changing, though, with several countries, including the UK, embracing reform in the hope of encouraging greater investment to enable innovative businesses to grow.

What is a SPAC and why are they used?

A SPAC is a company formed to raise money from investors which it then uses to acquire an operating business. SPACs are founded by a management team, known as a founder or sponsor; and are listed on a stock exchange through an initial public offering (IPO). Upon IPO, the SPAC will have no tangible assets or business operations. Investors in the SPAC are therefore investing in the ability of the sponsor to find an appropriate target to acquire.

The sole purpose of a SPAC is to identify and purchase a business that is consistent with its investment objectives. It may have specific investment criteria, or may be sector agnostic. The subsequent acquisition of a target company is commonly referred to as a ‘de-SPAC’ transaction. Once the acquisition is complete, the target company will have gained a public listing without having undergone its own IPO process.

Thilo Schneider of Pinsent Masons in London said: “The benefit of being acquired by a listed SPAC is that once the acquisition is complete, the target company will have gained a public listing without having undergone its own IPO process”.

Dr. Susanne Lenz of Pinsent Masons in Frankfurt added: “There are high expectations on increased SPAC launches in Europe, including Germany, in the coming months. The main reason is the success chartered in the US and changes arising in the regulatory environment in some of the European countries”.

Replicating the success of the US market

The US SPACs market dwarfs Europe’s currently. According to Deloitte, the value of SPAC IPOs recorded for the first five months of 2021 in Europe was $3.9 billion, compared to $98.5bn in the US. The number of issuances in Europe was 12 over the period, compared to 331 in the US.

Madrid-based Sergio Redondo Serrano and Rocío García Nardiz of Pinsent Masons said: “Traditionally, the US has had larger, deeper capital markets and SPACs have been part of the US capital markets for decades. Moreover, the latest economic measures enforced by the US government against Covid-19 have furthered the liquidity of the market and boosted the rise of SPACs”.

“At the same time, the SPAC bubble in the US has taken place in a ‘bull’ market – prices rising or expected to rise. with all indexes reaching the all-time highs, where the investors’ risk appetite is extremely high due to the tsunami of liquidity in the stock markets where they were looking out for growth targets, particularly tech targets.”

“Even European sponsors have traditionally been more inclined to list their SPACs in the US stock market than domestically,” Lenz added.

Sunjay Malhotra, also of Pinsent Masons, also highlighted the “more ‘risk on’ approach to blank cheque companies which exists in the US where investors are more willing to back charismatic founders” as a further factor in why European markets lag.

US regulation is also more favourable to SPACs than in Europe. The EU’s Alternative Investment Fund Managers Directive can trigger regulatory obligations on SPACs depending on how they are set up, for example.

There are signs of growth in the European market, however. Deloitte’s report highlighted the rise in activity levels in 2021 compared to 2020 where there were just four SPAC IPOs in 2020, valued at $496m in total.

Amsterdam is proving increasingly popular for SPAC listings.

Alexander Spoor of Pinsent Masons in Amsterdam said the regulatory regime, thriving technology scene in city and “impressive digital infrastructure” available – the Amsterdam Internet Exchange (AMS-IX) is one of the world’s largest data transport hubs – helps attract SPACs to Amsterdam.

“The Netherlands has a regulatory environment that is, from the perspective of most European countries, most comparable to that in US,” said “Foreign, predominantly US investors, understand the regulatory landscape.”

One aspect of regulation in the Netherlands that reflects the US regime, and which differs from most EU countries, is that investors can withdraw their money from a SPAC in the Netherlands after the SPAC has announced its target for acquisition.

Pierre François of Pinsent Masons in Paris said the minimum amount required to invest in a SPAC in Amsterdam is much lower than in Paris, and this is a further regulatory factor that is helping Amsterdam into a leading position in the European market.

“The minimum amount required in Amsterdam is €100,000 while the minimum amount in Paris is €1,000,000,” François said.

A changing regulatory environment

While Amsterdam has arguably been able to most closely replicate the factors that have led to a booming US market for SPACs so far, other European cities have ambitions of their own.

Frankfurt is another financial centre witnessing an uptick in SPAC deal-making, for example. However, restrictions on stock corporations under German law mean SPACs listed on German stock exchanges are generally launched by corporate entities established under Dutch or Luxembourg law.

Dr Thomas Biermeyer and Yann Payen of Luxembourg firm Wildgen said: “Luxembourg corporate law allows for flexible share redemptions, voting right adjustments, different share classes and specific financial and governing rights for sponsors and public investors. Moreover, the review process by the Luxembourg financial authority, CSSF, is quick and efficient which made it possible to capture some of this business from the Netherlands whose regulator was overwhelmed”.

Regulatory barriers have stalled growth in some other markets. The European Securities and Markets Authority (ESMA) this summer called for coordination in the approach taken to SPACs by national regulators in relation to prospectus disclosures and investor protection.

Redondo and García said: “European countries’ regulations are characterised as being extremely arduous and outdated regarding SPACs. This makes the EU less attractive than other markets such as the US or even other non-EU stock markets.”.

“The Spanish reality is completely different to the US market where SPACs are widespread due to its business leaders, financial markets, investments, and size of companies,” they said, adding that changes are needed to Spain’s Company Law and Takeover Law to better facilitate the use of SPACs in Spain.

“In this regard, Spain – like some other countries of the EU – is waiting for EU regulations to be updated to harmonise the rules across all jurisdictions and provide the necessary legal certainty required to do business inside the EU,” they said.

Some European markets are still at a very early stage of welcoming SPACs.

According to Martin Allan Christensen of Danish law firm Bech-Bruun, for example, new laws enabling SPAC listings only came into force earlier this year in Denmark. He said there have been very few traditional IPOs in Denmark and that “the mindset in the investor community is still more focussing on traditional venture and private equity”.

In Sweden, the first listed SPAC was recorded on the regulated market Nasdaq Stockholm in the spring of 2021, though this has spurred a “high” level of general interest and been followed by three other SPAC listings in the country, said Axel Helle of Swedish firm Setterwalls.

Portuguese firm SRS Advogados said that there is currently no specific legal regime for SPACs in Portugal and that no SPACs have yet been created or listed in Portugal. However, they said the Portuguese Securities Market Commission was “closely looking into this and expects to implement some changes in the regulatory framework in order to facilitate and position Portugal as an alternative jurisdiction for listing of SPACs in the EU”.

Another country considering reform is Switzerland.

Gian Marchet Kasper of Swiss firm Blum & Grob said: “As at today, no SPACs have been incorporated and listed in Switzerland as the current regulations and laws do not allow for it. However, the Swiss Stock Exchange (SIX) has opened a consultation on a corresponding regulatory framework to enable SIX-listed SPACs. There is some hope that the new rules could take effect even before the end of 2021”.

“The new regulatory framework intends to provide for a specific regulatory standard for SPACs, which is tailored to a SPAC’s needs. The new standard would enable a listing of both shares and convertible bonds of a SPAC,” he said.

There have been six SPACs listed in France to-date, the first of which was in 2016. However, Pierre François of Pinsent Masons said that despite the early involvement of prominent entrepreneurs in SPACs and associated interest from investors, the fact the first deal – the acquisition of French media conglomerate Mediawan – was “not a big success” had dampened investor appetite and the use of SPACs for a time. However, interest in SPACs in France has renewed as a slowdown in private equity investment during the Covid-19 pandemic spurred companies to look to alternative means of accessing finance quickly, he said.

Despite renewed interest in SPACs in France during the Covid-19 pandemic, as companies looked for quick access to finance following a slowdown in private equity investment, regulatory restrictions and the cautious approach of the regulator, Autorité des marchés financiers (AMF), present a barrier to SPACs in the country. Only professional investors can subscribe to shares of SPACs in France, while the AMF has shown interest in the measures SPACs have in place to protect investors, including around reimbursement and from conflicts of interest, he said.

In the UK, the regulatory regime relevant to SPACs recently changed. New listing rules, consulted on in the spring, came into effect on 10 August after a review, by Lord Hill, had identified recommendations designed to modernise the UK markets and attract a greater number of high-growth companies to list in London.

Alasdair Weir of Pinsent Masons said: “The difficulty for listing SPACs in London had been the presumption in the listing rules that insufficient information, particularly financial information, would be publicly available about the target company to allow the SPAC’s shares to continue trading throughout the acquisition process. Therefore, as soon as a potential acquisition was announced, a SPAC’s shares would ordinarily be suspended from trading, locking in the SPAC investors for weeks or months until the acquisition was completed, or terminated.”

“Reforms which came into force in August 2021 set out circumstances in which the Financial Conduct Authority will now be satisfied that the SPAC has sufficient measures in place to protect investors and so that the smooth operation of the market is not temporarily jeopardised, and a suspension is not required,” he said.

Lisa Early, also of Pinsent Masons, said that Ireland has the potential to attract SPACs in future if policymakers there pursue regulatory reforms. She pointed to the fact that Ireland is already an attractive jurisdiction for technology companies and US investment.

She said: “Historically Ireland has proved a popular choice for investment and acquisition by US investors and companies and it’s likely that, even if not listed in Ireland itself, US and UK SPACS may look to deploy capital raised in making acquisitions in Ireland and thereby increasing M&A activity in Ireland. A number of Irish entrepreneurs have been involved in US SPACs and have shown an appetite to continue to raise capital in this way. Additionally, there continues to be a very strong pipeline of Irish tech businesses ripe for investment, so it continues to be attractive for investment.”

“Ireland often follows the UK’s lead in terms of regulation, and it will be interesting to see the changes made to the regulatory framework in Ireland following the UK’s own review and changes,” Early said.

Sergio Redondo and Rocío García said that US interest in Irish tech business in comparison to other European markets could be based on the tax benefits, given Ireland’s historic lower corporate tax rate of 12.5 %. Historically, tech business in Ireland has been a long-established sector.

Risks

While SPACs offer European technology companies a faster way to raise finance on public markets than through their own IPO, there are risks to such arrangements.

Redondo and García added: “SPACs are highly dilutive in comparison with traditional IPOs. The SPAC’s dilution is unknown until the time of the merger, when shareholders decide whether to exercise their rights to redeem their shares. The Spanish Economy Ministry is looking to control the effect of share dilution in order to prevent investors who participate in the company after its incorporation from suffering unforeseen outcomes. The protection of investors must be based on the requirement for detailed information on the different situations that can occur, with dilution of their position being one of the most critical.”

Redondo and García also said that because SPACs are “highly speculative” this can impact directly on companies’ valuations and the resultant expectations of investors.