The LSE wants more SPAC’s in the UK but is this a good idea?
By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets
This week, the London Stock Exchange expressed interest in increasing the number of SPAC’s in the UK. For the unaware, SPAC’s (Special Purpose Acquisition Companies) have soared in population in the US this year. A company lists on the exchange, raising money to fund an acquisition. This shell entity then looks for a private company to merge with. This effectively enables a business to list on an exchange with less scrutiny. The LSE is interested in these vehicles for the fees they generate.
In the US, $49 billion has been raised for SPAC’s in 2020 — triple the amount last year. While in the UK, the total for 2020 is zero. These vehicles have got so popular that there is now a SPAC ETF for the hardcore gamblers who like to roll many dice simultaneously.
The problem is the companies that are using these vehicles. A large number are pre-revenue or pre-profit tech start-ups. Nikola is one example, which has not ended well, but there will undoubtedly be others. EV businesses have been especially popular.
SPAC’s are effectively vehicles for gambling on the stock market. In the UK, they would be even worse. Shareholders would be unable to vote on the acquisition or cash out if they disagreed with the purchases due to the UK rules. Timings would also be a problem; some SPAC deals in the UK initiated in 2017 have still not been completed.
It is also important to note that not all of these SPAC’s end up merging; they can remain flat for years, generating no return. The star power behind US SPAC’s is also a concern: it requires a cult of personality that is not at home in the UK, especially as these individuals would need to be given even more trust from investors because of the considerations above.
The FCA should not change legislation to allow this. If a company wants to go public, it can use an IPO; a SPAC serves little purpose beyond shifting risk onto the investor. Perhaps market players should be allowed to spend their money in this risky way, but beyond generating profits for the SPAC founder and allowing a company to list with less scrutiny, I do not see many benefits. The LSE should focus on increasing IPO’s. If you want to gamble, go to a casino; exchanges are better off without unpredictable SPAC’s.
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