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Special purpose acquisition companies (SPACs) shot to prominence in 2020 due to their popularity in the US tech sector.
SPACs have also been enthusiastically embraced by the space industry, which in the US has been having something of a bull run in the last twelve months with $8.7 billion of private equity having been pumped into the sector in spite of the pandemic. This is an increase of 95% on the previous year. The same has been happening with SPACs in the space sector with a string of deals valued at $9.3 billion announced since July 2020.
From Rocket Lab's Electron to Spire Global's small forecasting satellites, the US markets show huge appetite for the sector. Interest in the UK space sector could be just as enthusiastic judging by last week's US SPAC investment of $400m in British quantum technology encryption startup Arqit, using its planned satellite-based QuantumCloud system. The combination with Centricus Acquisition Corp, a Nasdaq SPAC, values the combined group at $1.4 billion.
In order to improve the competitiveness of the UK listing regime, Rishi Sunak launched the UK Listings Review in November 2020 and Lord Hill's recommendations, published on 3 March 2021 by HM Treasury, have now formed the basis of the FCA consultation paper [CP21/10: Investor protection measures for special purpose acquisition companies: Proposed changes to the Listing Rules | FCA].
The key concern for investors is that when a listed cash shell is considering an acquisition or merger, and a target is either announced or leaked, there is likely to be insufficient publicly available information on the target to enable an accurate assessment of the financial position of the shell company. Therefore the FCA will usually consider that a suspension is appropriate while the parties seek approval for admission to trading of the combined entity. This locks up investors for an uncertain length of time and also adds conditionality to the acquisition documentation, which is in turn unattractive to the target.
Lord Hill's Review recommends that the FCA should remove the rebuttable presumption of suspension and replaces it with rules and guidance to increase investor confidence in SPACs. In the US, SPACs are filed as Emerging Growth Companies using provisions which allow for confidential filings. They are also exempt from the usual requirement for three years of accounts and a minimum of $5 million in net assets. Lord Hill commented that there were a total of 248 SPAC vehicles listed in the US in 2020 raising a total in US$ of £63.5 billion, whereas the UK market is currently "dormant" with only 4 SPACs listed in the UK in the same period raising an aggregate total of £0.03 billion.
Following Lord Hill's recommendations, the FCA is proposing to remove the presumption of suspension for SPACs provided the following conditions are met:
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a minimum amount of £200m to be raised when a SPAC’s shares are initially listed
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ensure capital raised from public shareholders is ring-fenced to either fund an acquisition or is returned to shareholders—less any amounts agreed to be used for the running costs of the SPAC
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ensure public shareholder approval for any proposed acquisition, based on sufficient disclosure of key terms and a confirmation that terms are fair and reasonable if any of the SPAC’s directors have a conflict of interest relating to a target company
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provide a ‘redemption’ option allowing investors to exit a SPAC before the completion of an acquisition, and a two-year time limit (which can be extended to three years with public shareholder approval) on a SPAC’s operating period if no acquisition is completed
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provide investors with sufficient disclosures on key terms and risks from the SPAC initial public offering through to the announcement and conclusion of any reverse takeover deal
SPACs (and other funding) in the European Space sector
While we need to see the result of the FCA consultation in the UK (which runs to the end of May 2021) before we will know the direction of travel, it is widely expected that the UK's restrictions on SPACs will be removed or at least reduced. Assuming the changes flagged in the consultation are adopted, this could pave the way for an increasing wave of substantial investments in the European space sector using SPACs.
A move such as this is also likely to attract more private equity funding into the sector, building on recent growth in investments in European space businesses. Arqit saw $5m invested into its SPAC by Virgin Orbit so we could expect to see a wave of pre-IPO funding in any companies which would make good targets for SPAC acquisitions. Among space businesses with forthcoming fund raising plans, many will be now looking at the most effective channel for their funding. This could include seizing the opportunity to approach VCs, corporate VCs and other traditional early stage investors such as angel networks ahead of the expected rule changes.
This article was authored by Tim Bird, John Worthy and Brad Isaac, partners at Fieldfisher, with assistance from Jack Mason-Jebb, solicitor at Fieldfisher.