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The international financial regulation of SPACs between legal standardised regulation and standardisation of market practices

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Abstract

Special Purpose Acquisition Companies (‘SPACs’) are a new phenomenon in financial markets, and there is scant academic literature on the topic. This paper aims to provide a thorough overview of the remarkable story of SPACs from their origin, through blank check companies, to the development of a modern conception of SPAC. A comparative study is carried out by taking into account financial regulation and the ways in which SPACs are governed in different capital markets. Specifically, the American markets are examined, as well as new models of SPACs which have recently appeared on the Bursa Malaysia, the Toronto Stock Exchange and the Korea Exchange. To this end, the final consolidating remarks will serve as a way to evaluate proposals for a new international trend for global financial markets to follow in the coming years.

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Notes

  1. Cooper [1].

  2. Riemer [2].

  3. Castelli [3].

  4. Sjostrom [4].

  5. Davidoff [5]. According to the Author: ‘SPACs are a species of private equity: these are capital pools organized to acquire individual businesses. But because the general requirement that the initial acquisition comprise eighty percent of its assets, SPACs typically only acquire a single privately-held business. Despite these important distinctions, SPACs otherwise attempt to mimic private equity returns by employing comparable structures and practices. For example, SPACs utilize similar leverage to increase the size and potential returns of their acquisitions. The managers of SPACs are also typically provided twenty percent of the initial share offering at nominal amounts; ownership they are required to maintain until and after consummation of an acquisition. This ostensibly provides them with a similar incentive compensation scheme as private equity advisers’.

  6. One exception is the Korea Exchange where the issuance of warrants is not approved by Korean securities law. In light of this, managers of SPACs are willing to buy convertible bonds rather than warrants. Nonetheless, convertible bonds are not purely debt securities, but hybrid securities and warrants. Furthermore, some SPACs have financed the acquisition with facility agreements, but in this circumstance too, the level of debt has never been identified as a pure situation of leverage such as in private equity funds (see Lewellen [6]).

  7. Davidoff (n. 5) 225.

  8. Goode [7].

  9. D’Alvia [8].

  10. Valdez and Molyneux [9].

  11. Moloney [10]. Indeed, she highlights how ‘additional difficulties beset the EU, arising from the mis-match between the pan-EU operations of some major banking groups and nationally-based supervision and resolution regimes (…) at the core of the EU crisis was a destructive imbalance in the regulatory and supervisory architecture. The regulatory structure facilitated the cross-border activities of the large EU groups which had supported integration of the banking market, but it did not adequately address cross-border supervision, co-ordination, crisis resolution, and deposit protection’.

  12. Steven M. Davidoff, n. 28, 227.

  13. Sjostrom [11].

  14. According to the Equity Guidelines a SPAC as a: ‘a corporation which has no operations or income generating business at the point of initial public offering and has yet to complete a qualifying acquisition with the proceeds of such offering’. For further provisions in relation to SPACs in Malaysia please refer to http://www.sc.com.my/legislation-guidelines/equity/, accessed on 23 December 2017.

  15. SPACs are defined as ‘a corporation, the sole business objective of which is to merge the corporation with another corporation and issue the stock certificates through a public offering’.

  16. ESMA, Guidelines on key concepts of the AIFMD, 13 August 2013, n. 611.

  17. Indeed, the Directive 2011/61/EU on the Alternative Investment Fund Managers (AIFMD) does not take into account SPACs as a form of Alternative Investment Fund. The AIFMD is broad in scope and covers managers of all varieties of collective investment undertakings other than Collective Investment in Transferable Securities (UCITS), ranging from securities funds to funds investing in illiquid assets (real estate, private equity, infrastructure or goods like wine or art). It covers all possible investment strategies and disregards the legal form or structure of the collective investment undertaking, whether open-ended or closed-ended, or whether formed under contract or statute. For this reason, the ESMA has raised the issue in relation to the application of this directive to SPACs (see ESMA, Consultation Paper—Guidelines on key concepts of the AIFMD, 19 December 2012, n. 845, 33). Nonetheless, the market operators’ responses have not resolved the issue and today there is still no agreed legal framework on SPACs at either a European or national level.

  18. Valdez, Molyneux (n 49) 242–253.

  19. Shachmurove, Vulanovic, Specified purpose acquisition companies in shipping (n 34) 64, 70.

  20. Castelli (n. 3), 246.

  21. Shapiro [12].

  22. The North American Securities Administrators Association, Resolution of the North American Securities Administrators Association, Inc., declaring blank check blind pool offerings to be fraudulent practices (Cm 7032, 1989). Nonetheless, it should be noted that the statement made by NASAA in 1989 that described the blank check companies as a fraudulent instrument per se can be misleading. Indeed, a company can never become a fraudulent instrument per se unless unscrupulous managers direct it. Therefore, this severe judgment on blank check companies is connected to a strict policy adoption and political justification, which aimed to avoid frauds and solve an urgent risk of market collapse in the Penny Stock Market.

  23. Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. 101–429, Oct. 15, 1990, 104 Stat. 931.

  24. Title 17, ch. II, C.F.R. § 240.3A51-1.

  25. Securities Act of 1933, May 27, 1933, ch. 38, title I, 48 Stat. 74 (15 USC. 77a et seq.).

  26. 57 F.R. 18043, April 28, 1992; see Title 17, ch. II, C.F.R. § 230.419.

  27. See further in the previous paragraph 2.

  28. Currently, SPACs in the USA have only to file the following statements: a registration statement (Form S-1) with the SEC at the time of the IPO, then the information relating to the IPO are recorded in the final prospectus (Form B423), subsequently immediately after the IPO the SPAC issues another statement to disclose the amount of the fund raised on the capital market (Form 10-Q), and, finally, to announce a business combination (Form 8-K and 425).

  29. Riemer (n. 2), 944; specifically, he referred to them as ‘first generation SPACs’. Indeed, the voluntary compliance with the Rule 419 was an original invention of Mr. David Nussbaum, Chairman of GKN Securities.

  30. Castelli (n. 3), 254.

  31. Because it has been stated that SPACs are cash-shell companies, in this fashion the management at the time of the IPO is the only valuable ‘asset’ for the potential investors. Hence, the competences and the high expertise of the management are vital, and they represent a key factor for the success of the SPAC both in terms of investor protection and successful completion of the business combination.

  32. Riemer (n. 2), 946.

  33. Lakicevic and Vulanovic [13], Boyer and Baigent [14].

  34. Securities and Exchange Commission, Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Adopt New Regulatory Fees Payable by Certain Listed Companies and Applicants (Cm 34-70627, 2008).

  35. Securities and Exchange Commission, Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change to Adopt New Initial and Continued Listing Standards to List Purpose Acquisition Companies (Cm 34-57499, 2008).

  36. The American Stock Exchange is now known as NYSE MKT LLC. Indeed, AMEX has been purchased by NYSE Euronext in 2008 and renamed NYSE MKT in 2012. It is a financial market mainly designed to support younger, high-growth companies, and it is currently the leading exchange in the USA for small-cap companies.

  37. Castelli (n. 3) 238.

  38. Securities and Exchange Commission, Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Amendment No.1 and Order Granting Accelerated Approval to Proposed Rule Change, as modified by Amendment No. 1, to Adopt Additional Initial Listing Standards to list Securities of Special Purpose Acquisition Companies (Cm 34-58228).

  39. Securities and Exchange Commission, Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change to Adopt New Initial and Continued Listing Standards to List Securities of Special Purpose Acquisition Companies (Cm 34-57785, 2008).

  40. The NYSE in assessing the listing of a SPAC will take into account a set of conditions that are set forth in rule 102.6 of the Listing Company Manual such as: ‘the experience and track record of management; the amount of time for the completion of the business combination prior to the mandatory dissolution of the acquisition company; the nature and extent of management compensation; the extent of management’s equity ownership in the acquisition company and any restrictions on management’s ability to sell acquisition company stock; the percentage of the contents of the trust account that must be represented by the fair market value of the business combination; the percentage of voting publicly-held shares whose votes are needed to approve the business combination; the percentage of the proceeds of sales of the acquisition company’s securities that is placed in the trust account; and such other factors as the Exchange believes are consistent with the goals of investor protection and the public interest’.

  41. The main difference with blank check offerings is connected to the safeguards for investors such as the redemption right, the conversion right, the issuance of units during the IPO process, the escrow account for proceeds, and the high profile and expertise of the management who direct the SPACs (see further in this paper the international characteristics of SPACs).

  42. Such provision has been enacted in order to solve practical inconveniences such as the possibility that although the majority of shareholders approve a business combination, it may fail due to external factors (e.g. failure of closing after the signing of a letter of intent). In this way, funds for the redeemable shares may be missed.

  43. Securities Commission Malaysia [15]. Indeed, these Guidelines have been amended on the 18th of December 2013.

  44. Currently, Malaysia is attracting SPACs listings. Indeed, from 2011 to 2013 the Malaysia Bursa raised $7.5 billion as reported in the Wall Street Journal, ‘Malaysia attract blank check IPOs’ available at http://blogs.wsj.com/moneybeat/2013/04/18/malaysia-attracts-blank-check-ipos/ (18 April 2013) accessed on the 15th of September 2016.

  45. Lastra [19]. Indeed, according to Lastra the ‘top-down’ soft law is different from the ‘bottom-up’ soft law approach, which entails a self-regulation.

  46. Gullifer [16].

  47. Indeed, for the first time, Sect. 6, Part D of the EGs reads a series of obligations and features that the escrow agent or trustee must hold, and under section 6.50 EGs describe the possible contents of an escrow agreement or deed of trust. The provision, which subordinated the agreement to the governing law of Malaysia, is interesting.

  48. TSX Company Manual available at http://tmx.complinet.com/en/display/display_main.html?rbid=2072&element_id=642 accessed on 16th October 2018. The TSX Company Manual is based on the US regulation of SPACs that can be found in the NYSE and NASDAQ as explained in paragraph 3.

  49. Guidelines on the CPC have been issued by the Toronto Stock Exchange, available https://www.tsx.com/resource/en/47 accessed on 10th October 2018.

  50. The TSX Venture Exchange is regulated by the TSX Venture Exchange Rule Book, available at <https://www.tsx.com/resource/en/1465> accessed on the 10th October 2018.

  51. Section 1006 TSX Company Manual: ‘A SPAC seeking listing on the Exchange must not carry out an operating business. A SPAC may be in the process of reviewing a potential qualifying acquisition, but may not have entered into a written or oral binding acquisition agreement with respect to a potential qualifying acquisition. Every SPAC seeking a listing on the Exchange must include a statement in its IPO prospectus that as of the date of filing, the SPAC has not entered into a written or oral binding acquisition agreement with respect to a potential qualifying acquisition. A SPAC may have identified a target business sector or geographic area in which to make a qualifying acquisition, provided that it discloses this information in its IPO prospectus’.

  52. Section 1007 TSX Company Manual: ‘The Exchange will consider the jurisdiction of incorporation of a SPAC as part of the listing application process. The Exchange recommends that SPACs seeking listing on the Exchange be incorporated under Canadian federal or provincial corporate laws. Where a SPAC is incorporated under laws outside of Canada and wishes to list on the Exchange, the Exchange recommends that it obtain a preliminary opinion as to whether the jurisdiction of incorporation is acceptable to the Exchange’.

  53. Indeed, under section 6 (4) 14 of the Enforcement Decree the following listing requirements are imposed on SPACs:

    (a) A corporation shall deposit or trust of not less than the amount which is 90/100 of money collected through the issuance of stock certificates (excluding the securities issued before the initial public offering) with an institution prescribed and publicly notified by the Financial Services Commission, such as a company that obtained authorisation under Article 324 (1) of the Financial Investment Services and Capital Markets Act (hereinafter referred to as ‘securities finance company’), by the following business day of the deadline for payment of the stock price;

    (b) A corporation shall not withdraw or offer as security money deposited or trusted, as provided for in item (a) before registration of merger of a corporation with another corporation is completed: provided that where it is unavoidable for the operation of a special purpose acquisition company, such as the cases where it is necessary to purchase the stocks through exercise of the appraisal rights of shareholders under Article 165-5 of the Financial Investment Services and Capital Markets Act, as prescribed and publicly notified by the Financial Services Commission, the withdrawal shall be permitted;

    (c) One or more of promoters shall be the investment trader of equity securities (excluding the collective investment securities), the scale of which is equivalent to or greater than that prescribed and publicly notified by the Financial Services Commission;

    (d) An executive shall not fall under any of the subparagraphs in Article 24 of the Financial Investment Services and Capital Markets Act;

    (e) A corporation shall list the securities by the initial public offering on the securities market within 90 days from the deadline for payment for stock price;

    (f) A corporation shall complete the registration of merger with another corporation within 36 months from the deadline for payment for stock certificates by the initial public offering;

    (g) A corporation shall satisfy the guideline prescribed and publicly notified by the Financial Services Commission, as necessary for protecting investors.

  54. Kab Lae Kim, ‘The Characteristics of SPAC Investments in Korea’ (2010) 2 (3) Korea Capital Market Institute, 9, 14. He provides a table where difference between US SPACs and Korean SPACs is highlighted. It is interesting that under the Korean securities law a SPAC is not allowed to issue warrants at the IPO stage. It seems, therefore, that managers can be less controlled by shareholders in a moral hazard point of view. Nonetheless, it is possible for managers to buy convertible bonds at the IPO stage. This is not an assumption that SPACs are based on debt, because warrants as well as convertible bonds are hybrid securities. Therefore, they cannot be defined completely under the equity or debt securities. However, for our purpose further arguments will be raised in this paragraph taking into account the theoretical framework of SPACs between risk and uncertainty.

  55. This is the market for major blue-chip companies. It is essentially a stock market.

  56. This is the market mainly designed for start-up companies.

  57. Kab Lae Kim, n. 100, 13.

  58. Davidoff [17]. See Footnote 5.

  59. Financial Conduct Authority [18].

  60. Furthermore, Ocelot Partners and Wilmcote Holdings are other two main SPAC listings that occurred in 2017 for a total of 15 SPACs listed.

  61. The standard listing is preferred also because there is usually more certainty of the completion of the business combination because as opposed to the AIM, SPACs listed on the main market in the UK are not subject to a shareholder approval on acquisition. This means that SPACs are more flexible on the main market in the UK due to the avoidance of a veto power in the hands of minority shareholders.

  62. D’Alvia (n. 9), 1167, 1183. In particular, it can be seen that in Italy the AIM market is preferred due to the fact that the redemption right of the initial investment can be mitigated on the AIM venue rather than on the MIV where specific company law provisions must be applied to public companies. For this reason, between 2017 and 2018 there has been a great increase of SPACs on the Italian AIM with over 30 listings. One of these SPACs that has been listed in 2017 is Value for Italy, the SPAC founded by Gabelli.

  63. According to the Equity Guidelines a SPAC as a: ‘a corporation which has no operations or income generating business at the point of initial public offering and has yet to complete a qualifying acquisition with the proceeds of such offering’. For further provisions in relation to SPACs in Malaysia please refer to http://www.sc.com.my/legislation-guidelines/equity/, accessed on 23 December 2015.

  64. For instance, with reference to the first generation of SPACs that voluntary complied with Rule 419 in the USA although they were not obliged to do so, this fact evidences that a cash-shell company usually rejects any possibility of being defined tout court.

  65. Lastra [19]. Indeed, according to the Author the ‘top-down’ soft law is different from the ‘bottom-up’ soft law approach, which entails a self-regulation; furthermore in relation to soft law issues in connection with economic issues, please have reference to this non-exhaustive list of readings: Ellis [20]; Cottier and Lastra [21]; Guzman and Meyer [22]; Brummer [23].

  66. In this sense I have borrowed the terms ‘SPACs of first and second generation’ from Daniel S. Riemer, but with a totally new meaning in respect of the different functions that have been exercised by soft law approaches in terms of regulation.

  67. Lastra (n. 37) 462.

  68. D’Alvia (n. 9), 1167, 1183.

  69. Murray [24]. Indeed, on corporate standards of SPACs Murray has highlighted that the imitation of corporate standards by SPACs does not make them a financial innovation. Indeed, according to Murray a financial innovation in terms of SPACs can be categorised only if specific variations of corporate standards have been implemented such as the issuance of convertible bonds rather than warrants or the reduction of the acquisition period from a common 36 months time frame, etc.

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Acknowledgements

This paper has been awarded the Colin B. Picker Prize (honourable mention) by the American Society of Comparative Law in 2017. The Author is grateful to his supervisor Prof. Michelle Everson at Birkbeck University of London for her invaluable insights on Special Purpose Acquisition Companies.

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    Daniele D’Alvia

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D’Alvia, D. The international financial regulation of SPACs between legal standardised regulation and standardisation of market practices. J Bank Regul 21, 107–124 (2020). https://doi.org/10.1057/s41261-019-00100-5

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