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6 Key Lessons – ‘From Darkness to Light: A Comparative Study of SPACs in the European Union, the UK, and the US’

8th Feb 2023
Dr Daniele D’Alvia, a lecturer in Banking and Finance Law at CCLS Queen Mary University of London, is seen as one of the leading global figures specialising in the understanding of Special Purpose Acquisitiona Companies (SPACs).

JTC was delighted to have worked with Dr D’Alvia at a SPACs forum in JTC’s London office, as well as roadshows in Jersey and Guernsey, alongside Dewi Habraken from our Amsterdam team.

Dr Daniele D'Alvia and Dewi Habraken SPACs forum

With Dr D’Alvia’s kind permission, we have summarised the key findings from his analysis: ‘From Darkness to Light: A Comparative Study of Special Purpose Acquisition Companies in the European Union, the UK, and the US’.

As our leading expert in the field, Dewi Habraken is acknowledged by Dr D’Alvia for his contribution to the paper through his knowledge and practical experience of multiple Euronext and LSE SPACs.

You can access the full article from the Cambridge Yearbook of European Legal Studies here: CYELS

To find out more about JTC’s history with SPACs, please get in touch with Dewi directly.

 

According to Dr D’Alvia’s study, SPACs are relatively risk-free investments…to a point

By their very nature, all financial instruments have some level of risk inherent. Even government bonds, seen as one of the most risk-averse asset classes, still carry a low-level danger of default.

Until the moment of a business combination, Dr D’Alvia argues that a SPAC is a low-risk investment. However, as they are cash-shell companies, investors are not able to access previous balance sheets and rely solely on the management team that formed the SPAC (often referred to as the sponsor). With this in mind, the investment decisions by the sponsor become the only valuable asset and with it, the risk.

The Securities and Exchange Commission (SEC) has rightly stressed the importance of disclosures in terms of management’s conflict of interests, and to some extent the proposed SPAC reform is progressive.

 

Regulation has contributed to lack of IPO activity

The regulatory uncertainty established by the SEC, and its regulation by enforcement, are the main triggers of negative market conditions for both SPAC sponsors and investors.

This has also been exacerbated and amplified by the current rise in inflation and the Russian invasion of Ukraine at the start of 2022. This has led to global economic circumstances which are broadly not in favour of the IPO of private companies.

Historically, the US has established itself as the authority on SPAC corporate governance practices and listing requirements. However, since the beginning of the US SPAC boom in 2020, European regulators, especially including those in the UK, have studied the implementation of relevant financial regulation to facilitate SPAC listings in their jurisdictions and lure investors away from New York.

 

SPACs are without law, but not outside of the law

When a European Union Member State does not have specific legislation, or market rules on SPACs, then general principles and provisions of corporate and financial law still apply.

As a unique financial innovation, ‘SPACs are without law, but not outside of the law’.

It goes without saying that where there is no specific financial regulation in terms of listing requirements, then national corporate law will be applied. Furthermore, financial regulation of SPACs in Europe, if ever implemented at domestic level, must abide by a minimum level of protections in respect of both retail investors and sponsors’ disclosures, with the necessary clarifications in accordance with the ESMA public statement  on SPACs published in July 2021.

This is regulation by objectives.

 

Amsterdam is best placed to replicate US standards in Europe

Through an examination of European Member States, Dr D’Alvia found that the jurisdiction most resilient to US standards is the Euronext Amsterdam.

Although it does not have a specific financial regulation for SPACs, the flexibility of Dutch company law (such as BV entities) allows sponsors to replicate US-style features in their entirety.

This is also by virtue of uncodified market practices such as preference shares in terms of founders’ remuneration. The Amsterdam case directly illustrates the point: market practices and self-regulation matter. It is not fundamental to have lenient financial regulation for SPACs if sponsors can implement market practices under their national corporate legal framework.

Italy, Spain, Germany, and Belgium all have diversified legal regimes concerning redemption rights under their national company laws which creates difficulties for public investors, and has obliged sponsors to be creative in setting up SPACs in other jurisdictions.

This has resulted in using more flexible corporate laws such as Dutch or Luxembourg law, which are also closer to the flexibility of US corporate law from a de-SPAC perspective. Although this kind of forum shopping in Europe might act against the harmonisation aims of domestic corporate law frameworks, the establishment of a regulation by competition is not necessarily negative.

 

SPACs are not ‘backdoor’ listings

The latest SPAC reforms in the US claims that the de-SPAC transaction is basically an IPO for the SPAC target, resulting in some accusations of SPACs as ‘backdoor’ listings.

In reality, a SPAC can create unconventional transactions that include features that deviate from the normal SPAC structure, such as a reverse merger, or reverse takeover.

In recent years the de-SPAC transaction has seen remarkable development. As examples they can:

Target distressed entities and conduct possible restructuring procedures;

  • Cash out deals by which a SPAC can be a company vessel to facilitate a group’s expansion;
  • Acquire individual assets such as vessels of shipping companies. This function can be assimilated to a banking function and, therefore, might give rise to possible issues of ‘shadow banking’ and alternative access to finance by SPACs;
  • Merge with high growth companies, or zero-revenue companies. This function can assimilate SPACs to venture capital late-stage rounds of financing.

 

SPACs are not easily defined

Dr D’Alvia’s study demonstrates that neither the law, nor financial regulators can anticipate the different levels of complexity of the de-SPAC transaction. This leads to many definitions of a SPAC, depending on the various transactions which have already taken place, each creating different qualities and features for the completed SPAC.

In the UK, the Aquis Stock Exchange is useful to illustrate this. On this exchange, SPACs are defined as ‘Enterprise Companies’, more akin to private equity, which are able to provide finance or carry out acquisitions or takeovers. The emergence of new financing techniques at the de-SPAC phase in the US also show similar traits.

To this end, SPACs constitute a unique alternative acquisition model, rather than a pure alternative to the traditional IPO, as some would like to claim.

 

You can download the full study through the following link: