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.
Photo: The flexibility of Luxembourg corporate law is a key advantage for choosing Luxembourg as a SPAC incorporation jurisdiction / Credits © Shutterstock
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.
At the time of the IPO, the potential target is not know n 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 ow n 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 (allow ing, 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.