As a whole, global IPOs have reached a record high this past year, raising approximately $248 billion in share sales through 1054 listings. This includes SPAC listings, which have seen a particular surge, totalling $110 billion, with particular success in the tech and healthcare industries ($40.5 billion and $24.2 billion respectively). While the boom of SPACs has been particularly noticeable in the US, largely owing to the heightened market volatility as a result of the pandemic, and the subsequently accelerated timeline which SPACs offer for companies to go public, this effect has already transferred to Europe since the start of 2021. While Europe expects to see further growth in SPAC listings in 2021, they do not anticipate the same records as in the US, largely owing to the different regulatory flexibility of their respective jurisdictions. Pete Fricke, head of capital markets at Deutsche Borse, has said they expect at least a dozen further listing this year, while the CEO of Euronext Amsterdam asserts that “[their] pipeline for 2021 looks promising.’
To qualify, SPACs are ‘special purpose acquisition companies’, meaning that they are listed shell companies, i.e formally registered companies which do not conduct any operations, in which the founders, along with some outside investors, raise capital privately before acquiring or merging with a private company to publicly list, thus meaning they avoid the traditional IPO route, which involves an extensive registration process with the Securities and Exchange Commission. This proves advantages as a SPAC can raise funds with more limited disclosure as a result of not having an identified business purchased at the time of its IPO, while also proving a faster way to enter the public market, (4-6 months in comparison to 12-18 months for a regular IPO), as well as giving investors more time and flexibility to find the best acquisition targets.
Having said this, while SPACs can currently raise capital with more limited disclosure than a company using a traditional IPO, there have been recent concerns over heightened regulatory scrutiny. This is exemplified by the U.S Securities and Exchange Commission’s questioning in April 2021 of if the warrants of hundreds of SPACs can be considered equity instrument, thus meaning that many SPACs may have to refine their financial statements to account for their warrants as liabilities. The effect of this is palpable. While this is likely not the only contributing factor, the dramatic drop from $34.5 billion in shareholder money from global SPAC IPO’s in March 2021 to $3.7 billion in April demonstrates investor doubts about the effects of increased regulation expected to be implemented in the coming years.
The precariousness of SPACs can recently be seen in Nikola Corporation’s, which make hydrogen-powered trucks and battery-electric trucks, merger with the SPAC VectoIQ in June 2020. Despite their initial success, with their stock price soaring to $93.99, a 170% gain, in their first few days of trading, their plunge to $26.40 by 10 September, following the reports from short-selling firm Hindenburg Research accusing Nikola of making false statements about its technology, makes clear the potential danger of using SPACs and the growing scrutiny being placed on SPAC transactions.
One reason Europe has been successful so far in their SPAC IPOs is due to the effort to focus on rewarding investors, in comparison to the convention of SPACs generally giving their revenues to the founders/sponsors of the SPAC, with sponsors able to purchase up to 20% of the outstanding shares. Nevertheless, this shift has been demonstrated by the recent listing of REVO SPAC by Claudio Costamagna, who said that they are willing to give bigger payouts to their shareholders if they can deliver on the value.
Moreover, the over-saturation in the US market has also made Europe more attractive for listing SPACs. This is reflected in the increasingly large SPACs being launched in Europe, such as Tikehau Capital-backed Pegasus Europe, which raised €500 million in April 2021. The more flexible legislation amid the potential clampdown of the Securities and Exchange Commission on SPAC transitions in the US also makes Europe an attractive hub. This is most evident in the Netherlands, where, for example, no more than 30% of the shares issued by the SPAC can be redeemed by the shareholders, in comparison with up to 100% of the SPAC’s shares in the US. Similarly, the sponsor promote in the US is typically 20% of the SPAC’s outstanding shares in comparison with 8-10% seen in two of the SPAC listings in Amsterdam. This, therefore, exemplifies how Europe, particularly Amsterdam, may be more appealing for investors owing to the greater rewards.
Finally, looking to the future of SPACs in Europe, while Amsterdam has been the hub so far for SPAC transactions as a result of Dutch law not having any specific regulations for SPACs, as noted by law firm Freshfields Bruckhaus Deringer, the revision of rules planning to come following Lord Hill’s review on listings in the aftermath of Brexit expect to be welcoming to SPACs and thus give the London Stock Exchange a competitive edge in Europe.
Overall, predominantly owing to the faster time to the market SPACs can facilitate for companies, they are likely to continue to grow and prove a particularly attractive alternative for tech ventures than the traditional IPO. Having said this, the likelihood of increased regulation for the SPAC process could negate such advantages in the coming years, and thus it will depend on different jurisdiction’s varying regulations and willingness to welcome SPACs as to what European country will stand out in this field.
