In recent years, Special Purpose Acquisition Companies or “SPACs” have gained tremendous popularity in the United States. In 2020 alone, one hundred SPACs accounted for approximately $80 billion in US public fundraising.
Although that enthusiasm has not reached the same levels in continental Europe, these investment vehicles are also increasingly making their way into the different European markets. Today, about six SPACs are listed on Euronext Amsterdam. In Belgium, Euronext Brussels will soon see the arrival of its first SPAC, launched by investor and entrepreneur Dieter Aelvoet.
What is it?
A SPAC is an investment vehicle established by Sponsors (usually experienced investors such as credit institutions or private equity players) of which the sole purpose is to raise capital through an Initial Public Offering (IPO) and then to acquire a substantial shareholding presence in in one or more target companies.
The target companies are not yet identified at the time of the IPO, which is why SPACs are also often called Blank Cheque Companies. The investors agree to invest in the listed SPAC solely based on their confidence in the Sponsors and their project.
After the IPO, the Sponsors usually have about two years to identify one or more target companies. Within that same deadline, the “business combination” of the SPAC with those targets should also be closed. The business combination may take the form of a share deal, an asset deal, merger or combined transaction. If no suitable target company is found within this two-year term, then the SPAC is dissolved and the funds raised are returned to the investors.
Why are SPACs becoming so popular?
SPACs can offer investors an attractive return on their investment. At the same time, many SPACs are structured in a way to limit the investors’ risks:
The Sponsors usually bear (most) of the costs of the SPAC;
Investors who do not agree with the targets or transactions proposed by the Sponsors, usually have the right to get back (almost all) of the funds they invested;
If no target is found/no acquisition made within the time limit, then all investors have (nearly all of) their funds returned.
The Sponsors, often receive no (or only a small) management fee. However, they count on high returns on the participation (free shares/warrants) that they receive in the SPAC.
In Europe, there is no harmonised regime governing SPACs. Also in Belgium, there is no legal framework specifically regulating SPACS. Therefore, the set-up and operations of the vehicle must be tested against the principles of general corporate and financial law. For example, without being exhaustive:
the Belgian Companies and Associations Code will define the rules and limitations for the SPAC’s incorporation, any possible redemption of shares or return of investment to the investors, as well as the potential acquisition of, merger with or business combination with the target company.
As a listed company, the SPAC will be subject to prospectus requirements. Neither the European Prospectus regulation, nor the Belgian Prospectus law provide any specific requirements for SPACs. In other European jurisdictions, we see that a SPAC prospectus will focus on describing the Sponsors, the SPAC structure and the parameters for identifying the target(s) and the appropriate business combination. If the target company is already known at the time of the IPO, then extensive information will have to be provided to future investors to enable them to make an informed investment decision. As the SPAC structure is new on the Belgian market, our regulator, the Financial Services and Markets Authority (FSMA), has not yet developed a specific practice, nor issued any binding guidelines for SPAC prospectuses. Very recently the FSMA launched a public consultation on its proposal for minimum standards for the structuring, information disclosure and trading in SPACs on Euronext Brussels. The outcome is still unclear as the consultation was only closed on 31 March 2021.
Depending on their structure, SPACs could fall under the scope of the AIFM Directive and the Belgian AIFM law. If this were to be the case, then the SPACs as well as the Sponsors themselves could be subject to extensive regulatory requirements and supervision by the FSMA. Most Sponsors will seek to avoid the AIFM legislation’s application. This can, for example, be achieved in if the SPAC does not qualify as an AIF because it does not have a ‘defined investment policy’. The SPAC might also meet the criteria to qualify as an exempted holding company.
A new hype in Belgium?
Although SPACs seem to offer quite some interesting features and a potential alternative to ‘classic’ investments, the FSMA’s president has publicly criticised these new developments. The FSMA has warned that, for small investors, investing in a SPAC project could potentially lead to their money being diluted. In its public consultation, the FSMA already provided some recommendations on how such risks can be further minimised. Therefore, the question is how strict our Belgian regulator will be when the very first SPAC projects are presented to it and whether SPACs in Belgium will be ‘stillborn’.