SPACs have made their way to Europe and are starting to make it around the world. Switzerland is one of the very few jurisdictions where the regulator believes that a particular SPAC regulation is required. This article reports on the status of that project, the planned rules to the extent they are already known and the wider European and international context of SPAC regulation around the globe. It also touches briefly on the latest status of an important question which is whether a SPAC qualifies as a collective investment scheme.
By Matthias Courvoisier (Reference: CapLaw-2021-49)
A Special Purpose Acquisition Company (SPAC) is an entity that offers shares (and often warrants) in an initial public offering with subsequent trading at a stock exchange. The largest part of the IPO proceeds are normally paid into an escrow account or the like. The SPAC’s purpose is to merge with or to acquire a non-listed company (De-SPAC) not already selected at the time of the IPO and thereby to bring that company public and then to run the business of that company, now as a listed entity. Normally, the SPAC is set up by the founders and the sponsors. Further investors join at the time of the IPO and possibly in a private placement at the time of the De-SPAC. The IPO investors invest into listed shares and normally receive listed warrants to acquire additional listed shares. They have a right to resell their shares to the SPAC at the time of the De-SPAC, possibly depending on whether they voted for or against the De-SPAC. The sales price corresponds to their share in the escrow account. If no De-SPAC happens within a specified period of time (two to three years normally), the SPAC has to be dissolved and the remaining funds are returned to the IPO investors. Only after full repayment of the investment of the IPO investors, founders and sponsors receive liquidation proceeds. SPACs in the structure described are around since about twenty years in the US, showing an IPO of almost 1000 SPACs. Continental Europe became aware of SPACs during their boom in the US in 2019 through 2021. Almost thirty SPAC IPOs occurred in Europe during that period, mainly in Amsterdam, London, Stockholm, France and Germany.
In the first quarter 2021, an attempt was made in Switzerland to list a SPAC at SIX Swiss Exchange, but was stopped because of the regulator’s view that special rules need to be established first and that mere exemptions from the listing rules are insufficient. The Issuers Committee has established draft of such rules and started a limited consultation on 3 June 2021. Comments had to be handed in by 23 June 2021. As far as known, SIX Swiss Exchange is now in the course of clarifying final issues with FINMA to then file the final application or has already filed the final application with them. Key content of the proposed rules set out in the consultation proposal was:
– Introduction of a new regulatory standard: the regulatory standard defines which properties need to be met for a company to fall under the new rules. There are essentially two elements: (i) the sole purpose of the company is the acquisition or combination with an operating company and (ii) the De-SPAC needs to occur within a limited period of time which must not be more than three years.
– Defining several requirements that need to be met: the standard further defines a number of additional requirements for that the SPAC may be listed at SIX Swiss Exchange: (i) the IPO proceeds need to be deposited in an escrow account with a bank, must be used for operating purposes only to a very limited extent and must be held as cash deposits or other liquid funds, (ii) at least the IPO investors who do not support the De-SPAC must be granted a right to resell their shares, (iii) the IPO investors (and their successors in title) need to be granted a liquidation privilege over the other shareholders, and (iv) the IPO investors (or their successors) need to approve the De-SPAC with a majority of the shares represented at a special meeting of the IPO investors (and their successors).
– Providing for specific disclosures in the IPO prospectus: these specific disclosures include: (i) numeric examples regarding the dilution of an IPO investor in case of a De-SPAC and regarding the development of the funds held in the escrow account, (ii) conflicts of interest of founders, sponsors, board and management and precautionary measures taken, (iii) terms of the escrow account and the use of proceeds, (iv) information on the target market and the process of the De-SPAC, (v) information on founders, board members and management as well as their track record, (vi) role of coordinating banks and conflicts of interest, (vii) lock-up agreements, (viii) preferential treatment of IPO shares over other classes of shares in case of liquidation.
– Establishing and publication of an information document for the purpose of the De-SPAC: This document needs to be established with a view to the voting on the De-SPAC. The document needs to contain (i) information on the target, (ii) financial information to allow the decision about the De-SPAC, namely the publication of the last two annual reports of the target, whether according to a recognized standard or not, (iii) information on the turnover of business areas, spending on research and development and information on provisions and contingent liabilities, (iv) description of the corporate governance after the De-SPAC, and (v) information on the De-SPAC, namely the description of the transaction, the repurchase offer, conditions for settlement, financing of the transaction and role of the banks involved.
– Requirements after the De-SPAC: after the De-SPAC, the (former) SPAC is granted a period of three months to apply for a change of the reporting standard. Moreover, the (former) SPAC needs to publish quarterly reports if the target company had no financial reporting according to a regulatory standard for three years.
It needs to be seen whether these elements will be further extended or limited based on the consultation and the exchange between SIX Swiss Exchange and FINMA.
The planned Swiss specific SPAC regime is quite unique in the Western hemisphere. There is almost no Western country that has set out SPAC rules that are as specific and as comprehensive as the proposed Swiss rules on SPACs. In particular, neither the US, nor the UK, nor the Netherlands have implemented such rules. Only Italy set up a specific SPAC regime. There are however markets in the Asia-Pacific region where detailed SPAC rules have been put into operations, such as in Malaysia and Singapore. In Australia and Hong Kong, SPACs are currently not permitted.
ESMA has recently published a public statement on prospectus disclosure and investor protection considerations in respect to SPACs. While ESMA notices that SPACs may not be suitable for each investor and that the SPAC structure needs to be carefully studied by investors, it puts the emphasis on the disclosure in the prospectus and does not put forward any proposal with respect to certain structural features. ESMA’s proposals are substantially in line with the disclosures that are to be made under the Swiss prospectus rules, including the more specific disclosures described by the rules presented by the Issuers Committee for consultation. They are in certain elements somewhat more detailed, for example with respect to conflicts of interest. They mention some additional disclosures, such as (i) information as to whether major shareholders have different voting rights than other shareholders or no voting rights at all, (ii) whether it is expected that the funds raised in the IPO are sufficient to finance the De-SPAC as well as other sources of funds, and (iii) whether there is a substantial difference between the IPO price and the price paid by management, board and other affiliated persons for their investment into the SPAC during the year before the IPO. To the extent such information is material, it also has to be disclosed in a Swiss SPAC-IPO prospectus. In terms of disclosure at the time of the IPO, the European framework for SPACs does not deviate from the proposed rules in Switzerland. However, the European framework largely refrains from setting specific rules on the structure or SPACs and from defining the document to be published at the time of the De-SPAC. Clearly, the Swiss rules are today in line with market practice for SPAC structuring. Nevertheless, that may change in the future and the Swiss rules may then become outdated with the consequence that one would have to work with exemptions again.
One final observation deserves the question whether a SPAC is to be qualified as a collective investment scheme or an AIF in the EEA. Over the last few months a number of articles have been published on this topic in the EEA and in Switzerland. A review of these articles shows that the general view is that SPACs do not qualify as collective investment schemes or AIFs. Also, up to now, to our knowledge, no financial markets regulator has intervened in a SPAC incorporation or IPO because they were of the view that a SPAC is a collective investment scheme or an AIF. To the contrary: the Dutch regulator puts quite some scrutiny on this point and requires issuers to explain why they come to the conclusion that they are not an AIF. The topic is particularly important, not only for EEA SPACs, but also for US SPACs and Swiss SPACs because a qualification as an AIF would prevent the distribution of US SPACs and Swiss SPACs in the EEA.
Matthias Courvoisier (matthias.courvoisier@bakermckenzie.com)