The London Stock Exchange is set to change listing regulations as part of post-Brexit reforms and post-pandemic recovery measures. Aiming to boost London’s competitiveness, a key part of this involves SPACs.

Increasing numbers of US SPACs are approaching UK tech firms for mergers and Xavier Rolet, the former head of the London Stock Exchange, and Matthew Elliott say that the City of London should strive to become a global centre for SPACs. Commentators say the appeal of SPACs in the UK is severely limited and less competitive compares to the US. Since the start of 2020 only one SPAC has chosen London. Pressure has been piling on with Rolet and Elliott submitting a paper to the Future Regulatory Framework Review which argued “The UK needs to promptly consider the SPAC revolution.”

So, what is a SPAC?

SPAC is short for Special Purpose Acquisition Company. SPACs are essentially shell companies which float on a stock exchange in order to raise funds. Investors at this point tend to be pension funds, hedge funds and life insurance funds – institutional investors. Capital raised is then used to invest in or buy another business. This is the sole function of a SPAC. It has no commercial operations at all.

SPACs are sometimes nicknamed “blank cheque companies” as the initial investors do not know which company will be purchased by the SPAC. While the acquisition is being searched for then all funds go into a trust account which bears interest. The SPAC has a deadline within which the company to be purchased must be found. At the point of acquisition, investors can either accept their shares in the merged business or redeem their SPAC shares plus the interest acquired. Whilst its true SPACs have been around for decades, more recently the markets have witnessed an undeniable SPAC boom. In the first two months of 2021, more than 173 vehicles raised £55.2 billion – making the US SPAC craze the “dominant equity capital markets trend”.

Are there risks?

In response to questions over whether the SPAC boom constitutes a “bubble”, David Schwimmer, Chief Executive to the LSE, has warned of a “frothy” US market for SPAC companies. He stated that this market may have a negative impact on investors. He acknowledges the use of blank cheque companies as a tool, but offers words of caution. Schwimmer is not alone in his concerns about an overheated market. Russ Mould, Investment Director at AJ Bell stated “fear of missing out is just about the worst possible reason for making any investment decision… To let this emotion drive a change in the rules with regards to SPACs in particular would potentially expose investors to greater danger and the risk of portfolio losses.”

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