The European Securities and Markets Authority (ESMA) today published a disclosure and investor protection guidance on special purpose acquisition companies (SPACs).

While these companies may contribute to the equity financing of SMEs, it is important that SPACs also satisfy the relevant regulatory requirements, the regulator says. Therefore, the guidance seeks to promote coordinated action by National Competent Authorities (NCAs) regarding the scrutiny of the disclosure included in prospectuses relating to SPACs, which are approved in accordance with Regulation (EU) 2017/11291.

ESMA encourages NCAs to focus their scrutiny of SPACs prospectuses on a number of disclosure requirements:

• 1. Risk factors

The risk factors concerning both the issuer and its securities, taking into account the conflicts of interest inherent to SPAC transactions, the governance of the SPAC, the decision-making process concerning the business combination and any possible future dilution, such as dilution arising from the payment of the sponsors’ fees in shares, the exercise of warrants and/or in relation to the financing of the acquisition.

• 2. Strategy and objectives

A description of the issuer’s business strategy and objectives, both financial and non- financial (if any). This description shall take into account the issuer’s future challenges and prospects.

• 3. Escrow accounts and the reinvestment of the proceeds

Information on the funding structure of the issuer.

• 4. Relevant experience and principal activities of the administrative, management and supervisory bodies

An indication of the principal activities performed by the members of the administrative, management and supervisory bodies outside of that issuer where these are significant with respect to the issuer, as well as each member’s relevant management expertise and experience.

• 5. Conflicts of interest – sponsors

In particular, NCAs should check that the prospectus discloses any conflicts of interests arising under the following situations:

• in the event that the sponsors will lose their initial investment if no acquisition is completed by a specific deadline;
• in relation to any agreements with the sponsors restricting their disposal of the issuer’s securities;
• concerning any possibility that the SPAC could invest in companies associated with the sponsors;
• relating to the fact that the sponsors and their affiliates may have already invested in the same sector as the SPAC; and
• emerging due to the fact that the sponsors and their affiliates are not obligated to share any potential targets they identify with the SPAC and may acquire these targets themselves.

• 6. Shares, warrants and shareholder rights

Detailed information on the share and warrant structure, including information on any redemption, withdrawal rights and information about any rights that the shareholders meeting must approve concerning acquisition of the target company.

• 7. Major shareholders

This information should include:

• the name of any person other than a member of the administrative, management or supervisory bodies who, directly or indirectly, has an interest in the issuer’s capital or voting rights which is notifiable under the issuer’s national law, together with the amount of each such person’s interest or, if there are no such persons, an appropriate statement to that effect that no such person exists; and
• information as to whether major shareholders have different voting rights or an appropriate statement to the effect that no such voting rights exist. 8. Related party transactions

• 8. Information about any related party transactions.
• 9. Material interests

Information about any material interests in the SPAC transactions, including conflicts of interest.

• 10. Information on the proceeds of the offer

If the issuer is aware that the anticipated proceeds will not be sufficient to fund the entire acquisition, the issuer should include an estimation of the amount and sources of other funds needed, including further details about the proceeds since they are being used to acquire the target company.

• 11. Information on the intention of certain persons to subscribe in the offer

An indication of whether major shareholders or members of the issuer’s management, supervisory or administrative bodies intend to subscribe in the offer, or whether any person intends to subscribe for more than five per cent of the offer.

• 12. Information on the offer price

Any material disparity between the public offer price and the effective cash cost to members of the administrative, management or supervisory bodies or senior management, or affiliated persons, of securities acquired by them in transactions during the past year, or which they have the right to acquire.

ESMA and NCAs will continue to monitor SPAC activity to determine if additional action is necessary to promote coordinated supervisory action aimed at preserving investor protection.