Why the FCA Is Trying to Lure SPACs To the UK Markets

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Summary

• The Financial Conduct Authority (FCA) would be overhauling its rules to lure special purpose acquisition companies (SPACs) to the UK.
• SPACs do not have any business operations but raise money through market listings.
• These companies have become very popular in the US and raised £124 billion in the first two months of this year.

The Financial Conduct Authority (FCA) would be overhauling its rules to draw special purpose acquisition companies (SPACs) to the UK after they created quite a buzz on the Wall Street.

On Wednesday, the FCA said that it would begin a four-week consultative process on rules that need to be changed to deal with SPACs that have become hugely popular in the last year.

These companies do not have any business operations but raise money through market listings and then purchase another business using the money they raised. Investors in SPACs are generally retail investors who get access to private investments through these structures. Companies selling to SPACs get exposed to an easier and quicker way of listing on the stock markets. They are especially lucrative for private-owned business eager to cash out but cannot opt for a full market listing.

According to available data, these SPACs have raised as much as £124 billion in the first two months of 2021 in the US, which was almost close to the total amount raised through the whole of last year.

The FCA said it would come up with special rules that closely match that of those prevalent in other jurisdictions and would also ensure that the rules strengthen investor protection.

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The reform announcements come days after the Lord Hill review of the stock markets published in March. It said that UK markets need to be reformed so that it remains competitive with the international ones and one of the key proposals in the review was to liberalise SPACs rules so that more such structures could get listed in London.

One of the impediments highlighted in the review was the need to suspend trading after an acquisition is made public. This could make investors’ money getting locked in for a specific period of time. According to the FCA’s proposals, it would allow these structures to continue trading even after they identify an acquisition. The review also urged the watchdog to develop rules that would specify what kinds of information SPACs needed to disclose and on redemption and voting rights.

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In its consultation process, the FCA would take up minimum market capitalisations and higher disclosure requirements before the rules become operational in summer.

FCA’s announcement of an overhaul comes on the backdrop of Nikhil Rathi, CEO of London Stock Exchange, who said that the SPACs market was frothy and the US Securities and Exchange Commission starting an investigation into SPACs.

Some experts have even said that the present regulatory framework has several limitations for SPACs in the UK than in the rest of Europe, and more so compared to the US. These reforms, experts said, would be important to lure SPACs to the UK markets.