Whereas Particular Function Acquisition Corporations (SPACs) made a comeback to the American inventory markets in 2020, Euronext Amsterdam grew to become the SPAC champion on the previous continent, with 16 SPAC listings (FT, 17 February 2021). As we seem like previous the hype, burning authorized questions to grasp the authorized panorama for different funding funds, and specifically European SPACs come to the fore. One among these questions is whether or not European SPACs are topic to the Various Funding Fund Managers Directive (AIFMD)? There isn’t a clear reply to this query. On this article, I’ll attempt to summarize the professionals and cons and I’ll carry on three arguments why AIFMD may apply in my view.
The European Securities and Markets Authorities (ESMA) outlined SPACs in a public statement as “shell firms which are admitted to buying and selling on a buying and selling venue with the intention to amass a enterprise and are sometimes called clean verify firms”. SPACs sometimes work as follows. Firstly, SPAC insiders – umbrella time period for the sponsors, founders and administration of the SPAC – will set up the SPAC with a really restricted upfront funding, often $25.000, for 20% of complete shares. Secondly, within the SPAC-IPO, SPACs will concern “items”, usually consisting of a share and a number of warrants, in change for $10 of money.[1] Thirdly, following the deposit of the IPO proceeds in a belief account, the SPAC will start searching for a goal firm. As soon as a SPAC has discovered a specific goal firm, the negotiations between the SPAC and the personal working firm primarily have the type of a M&A course of. Lastly, when the SPAC and the goal firm agree on the merger, each firms mix into one new, publicly-traded firm within the so-called de-SPAC transaction.
The construction of SPACs has a lot of agency problems that had been additionally current in earlier generations of SPACs. MORLEY appropriately frames this concern when he says that “by repeating lots of the failures and successes of different improvements that got here earlier than, SPACs are taking this previous cycle and making it previous once more”. On high of the overall authorized uncertainty of a “new” phenomenon like SPACs, the pursuits of SPAC insiders and retail buyers are severely misaligned. This misalignment is the results of each the dilution of retail buyers and the “unit” construction (e.g. buyers can promote their shares within the de-SPAC transaction and maintain their warrants). Moreover, there are info asymmetries between the SPAC insiders and public buyers. SPACs don’t carry out any financial exercise and haven’t but selected a target-company. As a consequence, prospectuses are typically largely boiler-plate language and historic monetary info isn’t required, since there’s none (Prospectus Dutch Star Companies One, p. 44).
Scholars due to this fact declare that the disclosure necessities of SPACs are usually not as stringent as throughout a standard IPO. Latest litigation and regulatory proceedings have already surged in the USA, with shareholders claiming that SPAC sponsors offered insufficient disclosure (HLS Forum on Corporate Governance). To depart company issues unrestrained makes the authorized framework governing SPACs doubtlessly inefficient. There are causes to imagine that public shareholders, primarily retail buyers, are insufficiently protected towards the misalignment of pursuits, the complexity of SPACs and attainable misrepresentation of knowledge in SPAC-prospectuses.
On the coronary heart of the suitable coverage response lies the query whether or not the AIFMD applies to the SPAC administration workforce.[2] SPACs have notoriously tried to place themselves outdoors the scope of the AIMFD. Article 4(1)(a) AIFMD defines an Various Funding Fund (AIF) as a (i) collective funding endeavor (CIU) that invests (ii) raised capital in accordance with a (iii) outlined funding coverage for the (iv) advantage of buyers and that’s (v) not topic to the UCITS-Directive. It’s the SPAC’s administration workforce that can be topic to the AIFMD, if a SPAC meets the definition of an Various Funding Fund (“AIF”) (Artwork. 4(1)(b) AIFMD). You will need to be aware that the AIFMD applicability would finish after the de-SPAC transaction due to the holding firm exemption (Artwork. 2(3)(a) AIFMD).
The European supervisor ESMA revealed guidelines in regards to the AIFMD in 2013 and has not too long ago up to date its Q&A to incorporate a query on whether or not “managers of SPACs are topic to the AIFMD”. ESMA states that SPACs “won’t meet all the weather” to qualify and that this needs to be assessed on a “case-by-case foundation”, which doesn’t give a conclusive reply (Q&A, p. 46-47). Nearly all of students oppose the concept that SPACs needs to be topic to the AIFMD.[3] Even the UK supervisor FCA indicated in a policy statement that “it’s not [its] intention that the bundle of adjustments we consulted on ought to carry a SPAC inside the scope of the UK AIFM regime”. Different students are not sure whether or not SPACs are topic to the AIFMD or advocate a case-by-case strategy.[4] There’s, nevertheless, a compelling case for an AIFMD applicability on European SPACs, and such applicability may very well be environment friendly. A case-by-case evaluation for every SPAC nonetheless stays clever.
There’s dialogue whether or not SPACs are a CIU and/or have an outlined funding coverage. The opposite three circumstances of an AIF don’t appear to pose explicit issues. ESMA’s guidelines decide {that a} CIU doesn’t have a normal and industrial function, that it should increase capital with the purpose of a pooled return and that it can not grant day-to-day discretion or management to unitholders. I imagine that the preliminary funding in a SPAC, which takes place earlier than the de-SPAC transaction, is made as a pooled funding out of blind religion within the SPAC insiders. Though it could ultimately be undertaken with the target of constructing a long-term funding in a specific firm, this shouldn’t be seen as a normal and industrial function. This could solely be a sound argument after the de-SPAC transaction, when the holding firm exemption applies. I due to this fact imagine that SPACs may initially qualify as a CIU. In relation to the second situation, I’m of the opinion that SPACs sometimes have an funding function, i.e. to consummate a enterprise mixture and thereby generate a pooled return for buyers, that needs to be considered an outlined funding coverage (Prospectus Dutch Star Companies One, p. 59-60). That is the primary argument that I want to carry on.
A second teleological argument is predicated on the issues of AIFMD. Recital 2 of the AIFMD exhibits that the Directive was drafted to make sure a coherent strategy to the dangers associated to different belongings, and recital 3 states that it should kind a “framework that’s able to addressing these dangers considering the various vary of funding methods and methods employed by AIFMs”. If theAIFMD features as a ‘basket’[5] for all sorts of collective funding funds that don’t fall inside the purview of different directives then concluding a SPAC is an AIF appears simple. ESMA acknowledges this broad scope in its FAQ: “the overarching goal of the AIFMD is to create, for the primary time, a complete and safe framework for the supervision and prudential oversight of AIFM within the EU”. Different goals of the AIFMD, in line with ESMA, are: “the rise of transparency in the direction of buyers and the rise of the accountability of AIFM holding controlling stakes as different goals of the AIFMD” (FAQ). Merely put, the target of the AIFMD was to have a really broad scope and to incorporate all different funding funds.
A 3rd argument in favour of AIFMD applicability is that there’s resemblance of SPACs to the household of different funding funds, particularly personal fairness funds, of which the administration is topic to the AIFMD.[6] Recital 8 of the AIFMD particularly mentions that “managers of personal fairness funds or AIFMs managing AIFs whose shares are admitted to buying and selling on a regulated market shouldn’t be excluded from its scope”. Personal fairness funds are all non-listed entities and one could marvel how an “working, publicly listed firm” (SPAC) and a “typical AIF” may relate to one another. However the household resemblance is extra compelling than what meets the attention. Unsurprisingly, SPACs are oftentimes nicknamed a “single-shot private equity fund” or “poor man’s private equity fund”.
SPACs resemble personal fairness funds firstly, structurally. They each sometimes have a number of shareholders, are headed by exterior managers, have few full-time workers and solely have liquid belongings earlier than making any acquisition. Secondly, they spend money on firms based mostly on the administration expertise of the SPAC/PE-fund executives, who’re compensated equally, in an effort to maximise shareholder worth. Lastly, the identical kind of huge buyers (e.g. pension funds, household places of work, HNWI…) seem like the important buyers as so-called Restricted Buyers in a PE, and in offering extra financing for SPACs in a Personal Funding in Public Fairness (PIPE) so as to add liquidities for the proposed merger if many shareholders redeem their shares within the de-SPAC transaction.
In contrast to SPACs, personal fairness funds usually don’t dilute their “Restricted Companions”. Personal fairness funds furthermore have an extended time horizon than SPACs, which usually solely have 18-24 months to discover a appropriate goal firm. Conversely, if SPACs carry out a de-SPAC transaction, it instantly doesn’t have a predetermined time horizon anymore. DAVIDOFF feedback on the similarities between them: “regardless of essential distinctions, SPACs nonetheless try to duplicate the returns of personal fairness through the use of comparable constructions and procedures”. In fact SPACs are usually not an identical to non-public fairness funds. However it’s precisely the purpose of the broad vary of the AIFMD that SPACs shouldn’t be the Siamese twin of current different investments. Assembly the AIF’s definition suffices, which needs to be construed as broadly as attainable pursuant to the goals of the Directive. Having some resemblance to the household of different investments solely makes the case for its applicability extra compelling.
Transferring past an evaluation of the authorized lingo of the AIF definition, the safety of retail buyers usually warrants nearer examination in investigating the applicability of the AIFMD to SPACs. SPACs have a lot of authorized flaws, most of that are dangerous to particular person buyers.
AIFMD applicability signifies that SPAC insiders would require an AIFM authorisation. Because of this, the related monetary supervisor is given extra capabilities to affect the SPACs’ insurance policies by its supervision of SPACs. The applicability of the AIFMD would introduce “new” obligations for SPACs:
- The AIFM ought to have adequate preliminary capital and should cowl potential skilled legal responsibility dangers (Artwork. 8(1)(b) juncto 9 AIFMD). The previous obligation would possibly enhance the pores and skin within the recreation of SPAC insiders, while the latter could enhance ethical hazard if the SPAC insiders purchase Directors & Officers insurance to guard themselves towards skilled legal responsibility. Due to this fact, it’s tough to foretell the exact impact of the obligations.
- The data obligations and transparency necessities of the AIFMD would apply to SPACs. This info is usually already included within the SPAC-prospectus. In accordance with the AIFMD, SPAC insiders can be obliged to incorporate some extra info within the prospectus or disclose this info individually (Artwork. 23(3) AIFMD). Nevertheless, it’s uncertain that this may result in an actual enchancment in investor safety.
- SPAC executives must move match and correct exams. This can be a key part since SPAC-investors primarily purchase shares just because they imagine within the SPAC insiders. This is able to additionally keep away from conditions like in the USA the place well-known sportspeople launched SPACs (The economist, 16 February 2021).
- The AIFMD would require SPACs to have each a battle of curiosity and a remuneration coverage. The COI coverage could scale back company conflicts between SPAC insiders’ and public buyers’ pursuits, whereas the remuneration coverage could defend public buyers from the numerous dilution they at present endure.
The AIFMD won’t be capable to resolve all the deficiencies in SPACs’ construction, nevertheless it undoubtedly can be a step ahead in my view.
The query is whether or not the safety of applicability of AIFDM is preferable to a complete restriction of SPACs to the skilled section of economic markets as is the case on Euronext Paris (Euronext Paris Rule Book II, rule P.1.0.2.) and was additionally proposed by the Belgian supervisor FMSA in its consultation on SPACs. AIFMD applicability would have the benefit of investor autonomy. Colaert additionally argues that “product governance measures threaten to impair non-professional buyers’ entry to funding merchandise”. Though Colaert discusses “plain vanilla merchandise” which are considerably much less complicated, I discover that SPACs ought to stay obtainable to retail buyers. A whole ban is at all times efficient, however there would possibly exist extra proportional measures. AIFMD applicability may very well be an applicable answer to instantly defend the pursuits of retail buyers with out having to intervene out there and forestall the paternalistic fringe of the product governance regime.
AIFMD applicability would require intervention of the European legislator, nevertheless. In the meanwhile, AIFMD’s purpose of being a complete framework isn’t met in apply. This notion is supported by the truth that it’s nonetheless debatable whether or not SPACs match the definition of an AIF earlier than a de-SPAC transaction. Therefore, the scope of the Directive stays unclear however the not too long ago amended ESMA Q&A on the appliance of the AIFMD. The AIFMD’s present scope is, on the very least, much less intensive than what the Directive’s function suggests. SPACs due to this fact proceed to be a related case examine for the implications of economic regulation.
This publish is predicated on a grasp thesis written for the Economics, Business & Law degree (“ERB”) at KU Leuven.
Victor Denil
[1] See for a extra in-depth evaluate of the SPAC-structure: R. LAYNE and B. LENAHAN, “Particular Function Acquisition Corporations: An Introduction”, Harvard Law School Forum on Corporate Governance 2018; A.R. BROWNSTEIN, A.J. NUSSBAUM and I. KIRMAN, “The Resurgence of SPACs: Observations and Issues”, Harvard Law School Forum on Corporate Governance 2020.
[2] See for the definition of an AIF: C. MARTOUGIN, “The Various Funding Fund Managers Directive (AIFMD)”, Euredia: revue européenne de droit bancaire et financier 2011, 345-365; S. LANDUYT, “Toepassingsgebied van het wetgevende kader voor de fondsensector in België na de AIFMD”, RDC-TBH 2015, 666-682.
[3] See for instance: A. COIBION, A. DE SELYS LONGCHAMPS and V. BURKI, “Are we prepared for the SPAC? Testing the Belgian authorized framework”, TRV-RPS 2021, 431-448; M. DE MUYNCK and B. VAN DEN HOVE, “Particular Function Acquisition Corporations (SPACs): Inleidende beschouwingen naar Belgisch en Europees kapitaalmarktenrecht”, TBH 2021, 155-167; AFME and LATHAM & WATKINS, European SPACs: Information to Regulatory Obligations, 2022, 1-47, https://www.afme.eu/publications/reports/details/European-SPACs-Guide-to-Regulatory-Obligations.
[4] See for instance: S.N. HOOGHIEMSTRA, “Wat is een beleggingsinstelling onder de AIFM-richtlijn?”, Ondernemingsrecht 2014, nr. 3.3.1.; H.M. VAN KESSEL and D.J.R. LEMSTRA, “De SPAC (particular function acquisition firm)”, Ondernemingsrecht 2020/143, 794-805; T. CRUYSMANS, “Particular Function Acquisition Firm (SPAC) – Caractéristiques et cadre réglementaire de la nouvelle attraction boursière du second”, BFR 2021, 227-253; AFM MARKET WATCH, The Dutch SPAC market: an outline, 2022, 1-8.
[5] D. ZETZSCHE, “The AIFMD and the joint rules of European asset administration regulation” in D. ZETZSCHE (ed.), The Various Funding Fund Managers Directive, Wolters Kluwer, Alphen aan den Rijn, 2012, 748.
[6] D. ZETZSCHE, “Introduction: overview, regulatory historical past and method, transition” in D. ZETZSCHE (ed.), The Various Funding Fund Managers Directive, Wolters Kluwer, Alphen aan den Rijn, 2012, 10-13.
