To SPAC or not to SPAC?


Author: Neil Vickers


Pros and cons of reversing a business into a listed shell or to IPO directly on the LSE Standard List or AIM markets

Recent trends

Much comment has been generated by the increase in the number and scale of US technology and other IPOs this year. Much of this has been driven by a new found interest in IPO exits by venture capital funds, in particular via reversing into special purpose acquisition companies (SPACs).

One hundred SPACs have been floated in the US this year to await acquisition targets. Perhaps inevitably we will see these trends also gather pace in the UK equity markets as investors seek exposure to high growth businesses.

What is a SPAC?

A SPAC (or cash shell or blank cheque company) is typically incorporated and listed with no existing operations, for the purpose of making one or more acquisitions in a particular sector, but with no target specified on listing. The founders (or sponsors) are typically experts in the chosen sector or geography. Entrepreneurs considering floating their business should consider the SPAC route as well as a direct IPO.

In the UK, SPACs are now most commonly listed on the Standard segment of the FCA’s Official List, but also on the LSE’s AIM market. They are not currently eligible to be FCA Premium listed (but see below).

Investing in a listed SPAC

From an investor perspective, SPACs provide a private equity type investment with the liquidity of listed stock. And venture capital backed exits via a SPAC can offer investors access to more mature businesses which are in good financial standing.

As ever, it is about the SPAC’s management team and their ability to find and execute a good deal. In contrast to the US model, however, investors in Standard listed UK shells are not typically given the opportunity to vote on the chosen target, or to demand their money back if they disagree.

Whether to seek a SPAC

Is a SPAC a backdoor way to send a growth business public, or does it instead simply complicate the IPO process for the entrepreneur? As ever, it will depend on the particular circumstances of the case, some of which factors are summarised below.

Criteria in favour of reversing into a SPAC

  • Earlier certainty on pricing
  • Cash available to pay (at least deal costs)
  • Management team ready to execute swiftly
  • Incumbent investor base
  • Deal terms can be agreed in private before announcing intention to float
  • Possibly no need for fundraising roadshow before IPO

Reasons to IPO via a direct listing

  • A reverse takeover requires the SPAC’s shares to be suspended when announced and a full re-admission to listing, involving a prospectus or admission document and other regulatory obligations (in particular the likely application of the Takeover Code)
  • No need to negotiate sale and purchase agreement
  • Desire to avoid sponsors’ returns (typical carry 10-20 per cent)
  • Possible conflicts of interest by the sponsors in transactions
  • SPAC deals may be viewed by the market as opportunistic (especially if done near the investment deadline) and so priced at a discount.

The IPO regulatory landscape is in flux

There are other related equity market trends to keep an eye on:

  • US regulators now permit companies to do direct listings, offering shares directly to investors rather than via brokers, saving fees and avoiding the need for lock-in restrictions
  • US markets are also experimenting with companies holding IPO pricing auctions, hoping to leave less money on the table than by a bookbuilding
  • In the UK, the Government has launched a review of the FCA’s listing regime, to consider relaxing certain rules post-Brexit, including the three year track record for Premium listings and the 25 per cent free float requirement

Conclusion

We expect the US boom in SPACs to generate increased interest in their use in London, perhaps with help from our regulators, notwithstanding the differences across the Pond in the two regulatory landscapes and market characteristics.

Our IPO practice

Fladgate advises corporates, sponsors, nominated advisers and brokers on a wide range of IPOs and equity fundraisings. We help UK and overseas clients in multiple sectors, and have developed a strong track record in SPAC transactions for founders and in reverse takeovers on the Standard List and AIM.

Recent transactions include the reverse takeover of Hertsford Capital plc by marine technology group Otaq, the acquisition by technology and media platform group Entertainment AI of Blockchain Worldwide, advising the nominated adviser and brokers on the reverse takeover by brand protection company BrandShield of AIM listed Two Shields and the agreed acquisition of fund manager Oberon Investments by Baskerville Capital.

 

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