If London can’t beat SPACs, better join them

London’s regime for special purpose acquisition companies serves no one well. Its approach to investor protection is so crude as to have prevented the SPAC market from taking off at all. As the UK scrambles to bolster its post-Brexit finance industry, it should not dismiss the US model unless it can devise something better.
SPACs are publicly traded cash shells that merge with private companies. They offer a speedier and more certain route to a listing than an initial public offering. For investors, they provide access to innovative companies that might not qualify for an IPO. Even if the US market is showing signs of overheating, these vehicles have a role. London is seeing potential new
issues courted by New York.
Right now, Amsterdam is perceived as frontrunner to become a European SPAC hub. Why is London, the region’s main financial centre, being left behind? Ironically, for all its reputation for high standards, it’s because the UK’s blank-check regime looks pretty unfriendly to investors. A major obstacle is the listing rules’ “presumption” that unless a SPAC can provide a full prospectus on its proposed merger as soon as it’s agreed, the shares will be suspended. That risk deters investors from committing funds in the first place.
The logic for the requirement is that the blank-check company’s shares could be volatile as investors attempt to value its transformation from cash shell to operating company in real time. That, the reasoning goes, makes the situation more chaotic than when an established listed company announces a takeover.
But investors would surely prefer the risk of some choppy trading to that of not being able to trade at all. UK regulators don’t suspend the shares of listed operating companies announcing deals that radically change their strategy or indebtedness. Better to scrap the suspension rule and give SPAC investors alternative protections — like the ability to redeem their cash and to vote on the proposed merger, as in the US. A review of the listing rules, due to conclude soon, provides such an opportunity.
The trickier issue is whether the UK should explicitly allow SPAC mergers to be accompanied by the release of the target company’s financial forecasts. This is a key feature of US SPACs, and a real attraction for early stage businesses without a track record of revenue, let alone profit. An IPO prospectus includes only historical results. With a SPAC, forward projections may be used to persuade people to back the proposed merger. Sometimes they were already shared with new investors roped in to provide extra funds for the deal anyway.
The sight of SPAC targets that are little more than concept companies making grand claims for the future rightly raises concern. Some, perhaps many, won’t generate the sales needed to escape their history of burning cash. But allowing UK SPACs to do the same wouldn’t be such a radical leap, considering how London IPOs are conducted. Management teams are able to provide building blocks that help investment bank analysts construct financial models. After some error-checking via lawyers, the resulting research goes out to institutional investors. (By contrast, US IPOs don’t feature published research.)
This arm’s length process helps assuage directors’ worries about their legal liability for providing clues about the outlook. Indeed, the expensive rigmarole appears designed to create the impression that the forecasts in the research have nothing to do with the company’s own thinking, enabling managers to educate potential investors while feeling protected from claims if shareholders lose money.

—Bloomberg