On 15 July 2021, ESMA issued a public statement (the “Statement”) providing guidance on prospectus disclosure and investor protection considerations in special purpose acquisition companies (“SPACs”).
Background
SPACs are shell companies with no business activity, which are created for the sole purpose of raising capital through an initial public offering (“IPO”) with the prospect of acquiring an operating, non-listed company (the “Target”), resulting in the Target becoming publicly traded. Very popular for some time now in the United States, SPACs have recently gained some ground in European markets, offering an attractive alternative to the traditional IPO.
Summary
ESMA considers that the complex structure of SPAC transactions, as well as the differences in company law and market practices across the EU, create an additional need for uniform disclosure of information in SPAC prospectuses.
ESMA expresses the view that SPACs, due to their inherent complexity and risks, may not be suitable for all investors and expects careful assessment of such products in order to ensure compliance with the product governance requirements stemming from Directive 2014/65/EU of 15 May 2014 on markets in financial instrument (“MiFID II”).
While ESMA’s considerations are largely based on existing disclosure requirements under Regulation (EU) 2017/1129 (the “Prospectus Regulation”), ESMA underlines the need for supplementary disclosure, where necessary for investor protection.
Key prospectus content requirements
In the Statement, ESMA lists information that EU regulators should take into consideration when scrutinizing SPAC prospectuses. With reference to the various disclosure requirements under Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 supplementing the Prospectus Regulation, ESMA encourages national competent authorities (“NCAs”) to focus their scrutiny in particular on the following when reviewing SPAC prospectuses:
1. RISK FACTORS noting in particular those which are inherent to SPAC activity, SPAC’s governance, decision making procedure concerning the business combination and any potential future dilution.
2. INVESTMENT STRATEGY AND OBJECTIVES, more specifically information on the issuer’s investment policy and the criteria for the selection of the Target. Consistency with the rest of the disclosed information being key.
3. ESCROW ACCOUNTS AND REINVESTMENT OF PROCEEDS, this includes information on any escrow account or the re-investment of the IPO proceeds before an acquisition takes place, including any reliance on third parties and/or an investment policy.
4. MANAGERIAL EXPERTISE AND EXPERIENCE of the administrative, management and supervisory bodies, along with an indication of their activities accomplished outside of the SPAC.
5. CONFLICTS OF INTEREST OF SPONSORS who are responsible for setting up SPACs. In order to mitigate risk for investors, prospectuses must include any existing or potential conflict of interest, such as deadlines imposed to the sponsor, agreements between SPAC and sponsors, which may restrict the SPAC’s disposal of SPAC securities, sponsors’ rivalling activities in the relevant sectors.
6. SHARES, WARRANTS AND SHAREHOLDERS RIGHTS, which includes information of the share and warrant structure, including redemption rights and any rights that shareholders will need to approve concerning the acquisition of Target. SPAC prospectus should provide information on decision-making process with respect to business combination in the shareholders’ meetings.
7. MAJOR SHAREHOLDERS, which includes information on the name, scope of interest and the different voting rights of any person other than directors or members of the supervisory bodies who has any form of interest in the SPAC's capital or voting rights notifiable under the SPAC's national law.
8. RELATED PARTY TRANSACTIONS, more specifically any information about past and present related party transactions.
9. MATERIAL INTERESTS, such as services provided to the SPAC by the sponsors’ affiliates.
10. INFORMATION ON THE PROCEEDS OF THE OFFER, especially the financing of the acquisition in the event that the proceeds raised during the SPAC’s IPO do not cover the entire acquisition price, the use of proceeds raised from the sponsors and the total costs up to and including the acquisition of a Target.
11. INTENTION OF RELEVANT PERSONS TO SUBSCRIBE IN THE OFFER, especially when major shareholders or directors intend to subscribe to the offer and/or whether any person aims to subscribe for more than 5% of the offer.
12. INFORMATION ON THE OFFER PRICE, revealing material disparities between the IPO price and the real cost, i.e. discounts for directors, senior managers or affiliates, but also on securities acquired by them in the last 12 months or securities which they have the right to acquire.
Further mandatory disclosure
Notwithstanding the Prospectus Regulation, ESMA considers that additional disclosure is likely to be required to guarantee transparency and investor protection with regard to SPAC prospectuses. ESMA notes that NCAs may require the disclosure of supplementary information where necessary for investor protection. ESMA lists out some additional information points on which it considers NCAs should generally require disclosure for the purposes of investor protection.
Although addressed to EU regulators, ESMA’s guidance should of course be taken into account by issuers and their advisors when preparing SPAC prospectuses.
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