ESMA has issued guidance on what should be included in EU prospectuses issued by special purpose acquisition companies (SPACs).
- On 15 July 2021, ESMA issued a public statement seeking to promote uniform prospectus disclosure and protect investors in SPACs. This was prompted by the recent increase in European SPAC activity.
- ESMA's guidance provides greater clarity in this area, and should encourage regulatory consistency.
- We do not anticipate major changes to existing market practice to comply with ESMA's guidance. Most of ESMA's points are based on existing disclosure requirements under the Prospectus Regulation. In many cases they reflect how regulators in key EU jurisdictions have been applying these to SPACs. However, we expect that EU regulators will focus more closely on ESMA's points going forward.
- One potentially difficult area is ESMA's desire for information on future scenarios (i.e. future funding needs; possible dilution; post-acquisition governance and sponsor shareholdings, remuneration and role; and winding-up scenarios). Many of these will need to be negotiated. At the time of IPO, the identity and bargaining power of all counterparties will not be known. Unexpected outcomes are possible. We hope that EU regulators will be pragmatic, accept that pre-IPO disclosure will be illustrative rather than definitive, and permit additional disclosure (tailored to the circumstances) at the appropriate time.
- ESMA's guidance applies to EU prospectuses issued by SPACs, e.g. where the SPAC's securities will be admitted to trading on an EU regulated market. It does not apply to UK prospectuses issued by SPACs, although the FCA may consider it.1
Key prospectus content requirements
ESMA encourages EU regulators to focus their scrutiny of SPAC prospectuses on the following items required under Regulation (EU) 2019/980:
- Risk factors
These should take into account: (a) conflicts of interests (see below); (b) the SPAC's governance; (c) the decision-making process concerning an acquisition; and (d) any possible future dilution (e.g. from paying sponsors' fees in shares, warrant exercise or financing an acquisition). The prospectus should include a table or diagram giving an overview of the amount of possible dilution in different scenarios.
- Strategy and objectives
This should include details of the SPAC's investment strategy and target selection criteria, which should be consistent with the rest of the prospectus. E.g. if the SPAC intends to invest in a sector but could select a target outside it, then the SPAC's name should not imply that it will only invest in that sector.
- Funding structure
This should include information about any escrow account or the investment of the IPO proceeds before a target is acquired, any reliance on third parties and any investment policy.
- Directors' activities and experience
This should include an indication of the directors' principal activities performed outside of the SPAC where these are significant, and their relevant management expertise and experience.
- Conflicts of interests
This should include any conflicts of interests of directors, founders and senior managers relating to: (a) the sponsors losing their investment if no acquisition completes before a deadline; (b) agreements restricting the sponsors' disposal of SPAC securities; (c) the SPAC investing in targets associated with the sponsors; (d) the sponsors and affiliates having already invested in the same sector; and (e) the sponsors and affiliates not being obliged to share potential targets with the SPAC and acquiring these themselves.
- Shares, warrants and shareholder rights
This should include details of the share and warrant structure, including: (a) any redemption or withdrawal rights; (b) any shareholder approval rights concerning the acquisition of a target, the procedure for approval and the required majority; and (c) details of what the SPAC will disclose to investors regarding the target and the acquisition (which should be similar to the level of disclosure in a prospectus).
- Major shareholders
For any interest in the SPAC's capital or voting rights notifiable under the SPAC's national law (other than interests held by directors): (a) the holder's name; (b) the amount; and (c) any different voting rights.
- Related party transactions
Details of related party transactions to date.
- Interests of persons involved in the offer
This should include any services provided to the SPAC by parties associated with the sponsors.
- Offer proceeds
If the SPAC knows the IPO proceeds will not cover the entire acquisition, the prospectus should estimate the amount and sources of other funds needed. Information on different scenarios may be needed to provide investors with sufficient information. The prospectus should also provide information regarding the use of proceeds raised from the sponsors, the total costs up to and including the acquisition of a target, and whether there is any risk of a shortfall.
- Intention of directors or major investors to subscribe
Whether major shareholders or directors intend to subscribe in the offer, and whether any person intends to subscribe for more than 5% of the offer.
- Discounts for directors, senior managers or affiliates
Any material disparity between the public offer price and the effective cash cost to directors, senior managers or affiliated persons, of securities acquired by them in transactions during the past year, or which they have the right to acquire.
Additional required content
ESMA also considers that SPAC prospectuses should generally be required to include at least the following:
- Future remuneration of the sponsors and their possible role after the SPAC acquires a target.
- Information about the future shareholdings of the sponsors and other related parties.
- Information about possible changes to the SPAC's governance after it acquires a target.
- Details of possible scenarios that may arise if the sponsors fail to find a suitable target, e.g. winding up and de-listing the SPAC.
ESMA expects firms subject to the product governance requirements under MiFID II (2014/65/EU) to carefully assess whether retail clients should be excluded from the target market for SPAC shares and warrants, or even included in the negative target market.
We would be delighted to discuss any of these matters in more detail. Please contact your usual W&C contact for further assistance.
Peter Wilson (Senior Professional Support Lawyer, White & Case, London) contributed to the development of this article.
1 Paragraph 18 of https://www.fca.org.uk/publication/corporate/brexit-our-approach-to-eu-non-legislative-materials.pdf
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