ESMA encourages better scrutiny of prospectuses relating to SPACs
Michael Pelosi and Ioannis Sidiropoulos of Elias Neocleous & Co explain the provisions of a public statement issued by the European Securities and Markets Authority
The European Securities and Markets Authority (ESMA) has recently issued a public statement to promote coordinated action by national competent authorities (NCAs) regarding the scrutiny of the disclosure included in prospectuses relating to special purpose acquisition companies (SPACs), which are approved in accordance with Regulation (EU) 2017/11291 (Prospectus Regulation or PR).
ESMA has also issued this statement to draw attention to the importance of the proper application of the Directive 2014/65/EU (MiFID II) product governance requirements by manufacturers and distributors of SPAC shares and warrants, in accordance with the key ESMA objective of promoting investor protection. The statement is addressed to NCAs, however ESMA recommends its content also be taken into account by issuers when drawing up prospectuses concerning SPACs, and by manufacturers and distributors of SPAC shares and warrants.
The growth of SPACs
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.
The life cycle of a SPAC is typically divided into three phases, the first of which is the initial public offering (IPO) involving the approval and publication of a prospectus for the admission to trading on a regulated market and/or the offering to the public of the shares. In this stage the shares and warrants in the SPAC are admitted to trading on a trading venue. In the second and third stage, the SPAC searches for a target company to acquire and then there is the business combination with the target company, typically by means of a merger, thereby causing the target to become a listed company.
Fine tuning prospectuses
ESMA notes that these structures are complex, and as a result of differences in company law and market practices in various jurisdictions, investors need to study the structure of SPAC transactions carefully to ensure that they understand the transaction.
For this reason, ESMA considers the comprehensibility, and comparability of SPAC prospectuses, to be of significant importance, necessitating a uniform approach to be adopted by NCAs to the disclosures included in SPAC prospectuses. Whilst the public statement is addressed to NCAs, the authority uses the statement to also encourage manufacturers and distributers of SPAC shares and warrants to carefully scrutinise these products to assess whether they are appropriate for their clients.
Without prejudice to the other applicable disclosure requirements in Annexes 1 and 11 of the Commission Delegated Regulation (EU) 2019/980 (CDR 2019/980), ESMA encourages NCAs to focus their scrutiny of SPAC prospectuses on the specific disclosure requirements highlighted in the ESMA public statement for each category.
The matters highlighted by ESMA focus indicatively on disclosures relating to conflicts of interest, contracts with companies associated with the promoters, the amount of possible dilution, the selection process for the target company and information to be provided to shareholders about that selection process, information about major shareholders, related party transactions, and information about the financing of the acquisition of the target company. The full description of the matters ESMA wishes NCAs to focus on can be found in the full public statement that can be accessed here.
Furthermore, in order to boost convergence among NCAs in relation to the scrutiny of SPAC prospectuses, ESMA highlights the importance of NCAs ensuring that additional elements are included in SPAC prospectuses, such as:
The future remuneration of the sponsors and their possible role after the acquisition of the target company;
Information about the future shareholdings of the sponsors and other related parties;
Information about possible changes to the governance after the acquisition of the target company; and
Detailed information about the possible scenarios that may arise if the sponsors fail to find a suitable target to acquire, including possible scenarios such as the winding up of the issuer and de-listing of the shares.
Senior legal counsel, Elias Neocleous & Co
Associate, Elias Neocleous & Co