The market for initial public offerings by special purpose acquisition companies (SPACs) has shown significant growth in recent years and reached unprecedented levels in 2020 in the United States. While the United States are currently still the predominant market, the number of SPACs incorporated and listed in European countries is on the rise, with a rapidly growing number of deals since the last quarter of 2020. Considering Luxembourg’s attractive corporate and regulatory environment for listing vehicles, Luxembourg is also increasingly considered as a player on the rising European SPAC market.1
What are SPACs?
SPACs, often referred to as “blank check companies”, are shell companies formed and admitted to listing on a stock exchange for the sole purpose of subsequently acquiring or merging with one or more existing companies. SPACs are typically formed as empty shells by an experienced team of sponsors with an expertise in a particular industry or business sector, with the intention to raise money from public investors through an initial public offering (IPO) of the SPAC, which will subsequently be used to fund the acquisition of, or the merger with, an existing operating company in a specific industry.2
At the time of the IPO, the potential target is not known to the investors, who rely on the sponsors’ skills to identify the right combination partner, although SPACs may have specific investment criteria and investment focus.
For the target, the attraction of merging with a SPAC is that such a transaction offers a less burdensome, cheaper and quicker alternative to going public by its own means.
The IPO process of SPACs typically grants public investors the possibility to acquire “units”, consisting of shares and options to acquire further shares post-business combination in the form of warrants. The founding sponsors of a SPAC will typically retain a minority participation in the total outstanding share capital post-IPO, which will be subject to lock-up provisions for a certain period of time post-business combination.
The SPAC has a limited lifespan (of usually 24 months), determined from the moment of its IPO, at the end of which it must either have de-SPAC’ed, ie completed a suitable business combination, or will have to reimburse investors and be wound up. To this end, the proceeds from the IPO are placed in an escrow account and may only be disbursed to complete the business combination with a target or to reimburse the investors if no target is identified during the SPAC’s lifespan.
In addition to this money-back guarantee in the event that the SPAC should not find an appropriate target, investors are usually given the option to redeem their shares at the moment of the implementation of the business combination with the target.
Luxembourg’s strengths on the SPAC market
SPACs, being an “invention” of the U.S. market, are subject to local U.S. practices and standards. As such, a key requirement for a successful European SPAC is the ability to replicate such U.S.-driven features to the fullest extent legally permitted.
The flexibility of Luxembourg corporate law (allowing, inter alia, for a flexible share redemption framework, voting right adjustments, the ability to create different classes of shares, and the attribution of specific financial and decisional rights to sponsors and public investors) is thus a key advantage for choosing Luxembourg as a SPAC incorporation jurisdiction.
As Europe’s leading centre for investment funds (whether UCITS or alternative), Luxembourg, with its experience as a structuring jurisdiction for M&A/private equity/IPOs and its expertise in the listing of LuxCos on foreign stock exchanges, is ideally suited to attract SPACs.
The Commission de surveillance du secteur financier (CSSF), Luxembourg’s competent authority for the approval of IPO prospectuses (public offer / admission to trading on a regulated market) has the reputation of being a proactive and pragmatic, yet investor-protective, regulator. An efficient review process can be assured, with first comments on the IPO prospectus usually being provided within ten working days and subsequent reviews within only a few days. This is important given the tight timeframe for SPAC IPOs (generally around eight weeks). It is also possible to obtain early (informal) clearances on key issues for the IPO prospectus, such as the financials to be included.
Upon approval of the IPO prospectus, the CSSF can send out intra-day passporting notifications for EU-wide public offers and/or admissions to trading on EU regulated markets. Regarding the listing venue, a listing on the Luxembourg Stock Exchange’s regulated market can be considered. Dual listings (in Luxembourg and on another EU regulated market) are also possible.
Another key advantage is that an IPO prospectus to be approved by the CSSF can be drawn up in English, German or French.
Specificities of SPAC IPOs
Given their specific nature, SPAC IPOs are, to some extent, more straightforward and can usually complete on a shorter timeline, but can also raise different legal issues from those which affect traditional IPOs:
- The IPO prospectus needs to meet the requirements of the EU Prospectus Regulation.3 Disclosure requirements may vary depending on the industry targeted by the SPAC.
- Certain sections of the listing prospectus will inevitably be lighter than for “standard” IPOs, with the business description focussing merely on the investment scope and parameters to be taken into account by the SPAC for the identification of an appropriate target and the financial section being reduced to a strict minimum given the absence of an operating business and relevant financial history.
- The risk factors in the prospectus will mainly focus on the fact that the SPAC has not yet identified a target and hence has no operating history and is dependent on key persons. They highlight that investors have no basis on which to evaluate the SPAC’s ability to achieve its business objective.
- Two key sections of a SPAC prospectus on the other hand will be the (i) offering section, which will contain a detailed description of the proposed structure and public investors’ rights at the different phases of life of the SPAC, and (ii) the management section, which will contain a comprehensive report of the founding sponsors and the management team, as well as their investment experience, as a significant driver in the successful marketing of the offering.
SPACs further need to pay great attention to determining the appropriate corporate governance rules, balancing the imperative of enabling the management team to achieve their objectives with the necessity to offer appropriate guarantees to potential public investors.
Given that SPACs cannot identify acquisition targets prior to the IPO, to avoid having to include detailed financial information about the target in the prospectus and thereby inevitably delaying the IPO, the vetting process for potential targets must be conducted in line with strict market disclosure requirements following the IPO.
The preparatory due diligence as well as the negotiation and structuring of the terms of the business combination are highly transaction-specific and require, as for any M&A transaction, an extensive analysis of the legal framework and the tax structure, as the profitability of the SPAC is intrinsically determined by the identification of the right target and the success of the business combination.
Depending on the nature of the contemplated business combination, the content of the information to be made publicly available varies and timing constraints need to be anticipated.
While SPACs usually do not meet the criteria to qualify as alternative investment funds (AIFs), or fall under one of the exemptions provided for by the Luxembourg AIFM law4, this topic needs to be taken into account for the set-up of the SPAC’s structure to avoid a qualification as an AIF.
The arrival of the SPAC wave in Europe will undoubtedly be welcomed by investment banks and experienced sponsors wanting to tap into new opportunities and by retail investors wanting to bet on innovative and high-growth companies that historically would not have entered the public market at a comparatively early stage in their development, or ever. Luxembourg’s legal framework and deal expertise certainly position it among the key jurisdictions to consider for the incorporation of future SPACs.
1. As illustrated by the listing of Lakestar SPAC I SE, a Luxembourg-incorporated SPAC on the Frankfurt Stock Exchange in February 2021 (https://www.bloomberg.com/news/articles/2021-02-22/lakestar-gains-in-largest-europe-tech-focused-blank-check-debut).
2. See as a recent illustration the merger of Spire Global (the Luxembourg-backed global space-to-cloud data and analytics company) into NaviSight, a Defense and Government Technology-focused SPAC (https://navsight.com/press-release).
3. Regulation (EU) 2017/1129 and the Commission Delegated Regulation (EU) 2019/980 for a public offer and/or admission to trading on a regulated market of the shares
4. Law of 12 July 2013 relating to alternative investment fund managers, transposing the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers.
Jacques Graas - Partner
Paul Peporte - Partner
Serge Zeien - Counsel
Sabrina Goncalves - Senior Associate
Victoria Woestmann -Senior Associate
Guillaume Foillard - Associate