17 septembre 2021 Sarah Debney Capital Markets - Equity

ESMA statement on SPACs: prospectus disclosure and investor protection considerations

Recently, SPACs, or special purchase acquisition companies, have been enjoying a moment in the sun. Alongside increased popularity often comes increased attention from regulators and SPACs are no exception with the European Securities and Markets Authority releasing a statement focusing on the prospectus disclosure SPACs should be making and who should and shouldn't be investing in them.

The statement is addressed to National Competent Authorities but ESMA highlights that it should also be taken into account by issuers and manufacturers and distributors of SPAC shares and warrants under MiFID II.

Will this apply in the UK?

As this statement is made after the end of the Brexit transition period, the Financial Conduct Authority in the UK is not bound to follow it and has not mentioned how it will approach the statement thus far.  However, SPACs are currently a topic of discussion in the UK so the statement is, at least, of interest in the UK.

Prospectus disclosure

ESMA encourages NCAs to focus their scrutiny of SPAC prospectuses on a number of particular requirements including:

  • Risk factors – issuers should provide an overview of the amount of possible dilution in different scenarios by using a table or diagram.
  • Strategy and objectives - issuers should provide detailed information about their investment policy/strategy, and the criteria for the selection of the target company. NCAs should ensure that this investment policy/strategy is consistent with the rest of the information in the prospectus.
  • Relevant experience and principal activities of the administrative, management and supervisory bodies
  • Conflicts of interest - NCAs should check that the prospectus discloses any conflicts of interests of those setting up the SPAC.
  • Shares, warrants and shareholder rights – the prospectus should contain detailed information concerning the procedure for approving the business acquisition meeting and a detailed description of the disclosure that the issuer will provide to the shareholders' meeting about the target. NCAs should ensure that SPACs provide investors with, in relation to the business combination, a level of disclosure similar to that included in an approved prospectus.
  • Material interests - issuers should disclose any services provided to the issuer by parties associated with the sponsors.
  • Information on the proceeds of the offer -  the prospectus should include information about the financing of the acquisition of the target company in the event that the proceeds do not cover the entire acquisition price.

Are SPACs suitable for everyone?

ESMA states that SPACs may not be appropriate investments for all investors due to their complexity. The statement goes on to highlight factors such as the risks related to dilution, incentives issues for sponsors and the identification and evaluation of target companies.

ESMA further notes that SPAC shares and warrants are subject to the MiFID II requirements on product governance under which manufacturers and distributors must conduct a product approval process to decide on the suitable target markets for SPAC shares and warrants. ESMA advocates careful scrutiny to  assess whether retail clients should be excluded from the positive target market or even included in the negative target market.

Remind me, what do SPACs do?

SPACs are shell companies that are admitted to trading on a trading venue with the intention to acquire a business. The persons responsible for setting up SPACs are the sponsors, who typically have significant expertise in one or more economic sectors and use the SPAC to acquire companies in those sectors. SPACs sell their shares, often together with warrants, to investors to finance the acquisition.

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