ESMA publishes disclosure and investor protection guidance on SPACS

The European Securities and Markets Authority (ESMA) has issued a public statement on SPAC information disclosure and investor protection issues.

Due to the increasing activity of SPACs in the EU, ESMA has issued a public statement to promote coordinated scrutiny activities by national competent authorities (NCA) when a prospectus is required. A prospectus will generally need to approved by a NCA in the framework of the admission to trading of the SPAC shares on a regulated market and/or in relation to any offering to the public of such shares. ESMA has also raised disclosure concerns aimed at preserving investor protection where no prospectus is needed, specifically relating to the De-SPAC (i.e., the business combination of the SPAC with a target)

Although IPO prospectus content may differ depending on the applicable company law and market practices, ESMA understands that NCAs should focus on the following disclosure requirements, among others:

• Risk factors: Overview of the amount of possible dilution in different scenarios.

• Strategy and objectives: Detailed information about the investment policy/strategy and the criteria for selecting the target company.

• Issuer’s funding structure: Description of any escrow account or reinvestment of the proceeds of the offering in the period before the De-SPAC.

• Management experience: Information on the relevant management expertise and experience, as well as the principal activities of the managers performed outside of the issuer.

• Conflict of interests: Description of any conflict of interests arising in the following situations: (i) sponsors losing their initial investment if no De-SPAC is completed; (ii) sponsors not being able to dispose of the issuer’s securities; (iii) SPAC investing in companies associated with the sponsors; (iv) sponsors and their affiliates investing in the same sector as the SPAC; and (v) sponsors and their affiliates not being obliged to share potential targets with the SPAC and, therefore, being able to acquire these targets themselves.

• Information to shareholders: Detailed information on the share and warrant structure and on any redemption and withdrawal rights of the shareholders rejecting the De-SPAC. Prospectuses need to include detailed information concerning (i) the procedure for approving the De-SPAC (including required majorities for its approval); and (ii) the discosure of the target company and the business combination that will be provided to the shareholders’ meeting, especially if no prospectus is presented to investors regarding the business combination. In this case, NCAs should ensure a similar level of disclosure as the one included in an approved prospectus.

• Information on the proceeds of the offer: If the issuer is aware that the anticipated proceeds will not suffice to fund the entire acquisition, the issuer should provide the estimated amount and sources of other funds needed.

• Potential investors: Statement of whether major shareholders or managers intend to subscribe in the offer or whether any person intends to subscribe more than 5%.

• Offer price: Material disparity between the public offer price and the effective cash cost to managers of securities they acquired in transactions during the past year.

NCAs should also require additional information not expressly established by the Prospectus Regulation, to allow investors to make an informed assessment of the issuer and the securities, including information on future remuneration of the sponsor and their role after the De-SPAC; possible changes to the corporate governance after this milestone; and possible scenarios that may arise if the sponsor fails to suceed on the De-SPAC (including the winding up of the issuer and de-listing of the shares).

ESMA also points out the importance of proper application of product governance requirements under MIFID II by manufacturers and distributors of SPAC shares and warrants. ESMA understands that the structure of SPACs’ transactions is complex and may not be an appropriate investment for all investors. Therefore, manufacturers and distributors should assess whether retail clients should be excluded.

ESMA and NCAs will continue to monitor SPACs’ activity in the EU to assess further initiatives aimed at preserving investor protection.