“Spac share prices slump as enthusiasm wanes”, announced the Financial Times on 2 May. “A reckoning for Spacs: will regulators deflate the boom?”, the newspaper warned on 4 May. “The SPAC Bubble Is Bursting”, according to an investment news website in May. Contrast such headlines with the title of a recent event held in Luxembourg “SPAC CRAZE: Why sponsors and targets have become crazy about Luxembourg”.
A SPAC or ‘special purpose acquisition company’ is a vehicle that’s taken public, typically by an asset manager or private equity fund, to raise money from public investors in order to target another, usually larger private company for acquisition via what is referred to as an “initial business combination” or “De-SPAC transaction”. Thus the private company is taken public without going through the traditional initial public offering (IPO) process.
Selling to a SPAC can be attractive for owners of smaller companies, often private equity funds, as it can raise the price by up to 20% over a typical private equity deal. Being bought by a SPAC can also offer owners what is essentially a faster IPO process guided by an experienced operator, with fewer concerns about swings in broader market sentiment.
SPACs became widely known for the 83 billion USD invested into them during 2020, mostly in the US. Academic research has shown that investor returns on SPACs are nearly always negative, though the sponsors involved with the SPAC’s flotation do well.
In Luxembourg, however, a recent event seeming to challenge the “bad news for SPACs” view was organised by AmCham, Luxembourg’s American Chamber of Commerce, along with the US-based Luxembourg-American Chamber of Commerce (LACC). LACC president Michel Franck said that the event was so popular that “we broke our record”, with over 250 having registered.
Questioning the narrative
Chris Lallo, a partner in the international tax and transaction services practice at Ernst & Young, said he’d seen no bad news effect. In the first three months of 2021, there had been over $100 billion USD invested in SPAC IPOs. “So 2020 was a record year, but 2021 eclipsed that just in the first three months of the calendar year.”
He explained that this materialised in the more than 500 public SPACs on the market, with over 400 “still looking to announce a deal with a target to take that company public.”
Lallo addressed the press coverage of recent American Securities and Exchange Commission (SEC) press releases concerning SPACs. At least one of the releases changed the accounting treatment of an aspect of SPAC ownership (the SPAC warrant).
He was dismissive of the reporting: “I think, if you believe the press, those releases are having a much more detrimental impact than certainly we’re seeing in practice and there still is a very large appetite from our clients to continue to sponsor SPACs,” Lallo told the virtual attendees at Amcham’s online session.
So why Luxembourg for SPACs?
The large number of SPACs seeking target companies, Lallo explained, is part of what is driving the interest in Luxembourg. “SPACs have been forced to really look on an international scale for their acquisitions targets,” he said. Europe is seen as the next-easiest place to get such deals done, he said.
According to Carsten Berrar, Managing Partner Frankfurt at Sullivan & Cromwell LLP, of all of Europe, only Luxembourg and the Netherlands have sufficiently flexible corporate law to make them popular choices for registration.
He said an important question was which regulator you want. If you choose Luxembourg you get the CSSF which is a “very, let’s say, pragmatic and reliable regulator,” he said.
Berrar went on to explain, approvingly that the CSSF only takes five to six weeks from receiving the prospectus to issuing its approval.
When it comes to listing the SPAC, most list either on the Frankfurt or on the Euronext Amsterdam exchanges, he explained, before remarking “it’s a pretty easy process because the CSSF just passports the prospectus to either Germany or the Netherlands.”
Luxembourg tax advantages
Alexandre Pouchard, an Ernst & Young partner, then outlined a series of tax advantages for using a Luxembourg company as a SPAC. For example, he said, Luxembourg makes it easy to move a SPAC to or from Luxembourg. “Unlike many other jurisdictions, you can migrate from Cayman to Lux, and from Luxembourg to overseas, without interruption of the legal personality.”
Pouchard concluded “Luxembourg is likely to remain a permanent fixture when it comes to evaluating whether Luxembourg could be your jurisdiction” for a SPAC.