No. 77 Spotlight on SPACs in the Fintech Sector: Evolving Market Trends and Recent Regulatory Developments for SPACs in the United States, the United Kingdom and Europe


Publish Date:
August 12, 2021
Publication Title:
TTLF Working Papers
Stanford Law School
Working Paper
  • Diana Milanesi, Spotlight on SPACs in the Fintech Sector: Evolving Market Trends and Recent Regulatory Developments for SPACs in the United States, the United Kingdom and Europe, TTLF Working Papers No. 77, Stanford-Vienna Transatlantic Technology Law Forum (2021).
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Recent years have seen significant market developments and increased innovation in capital markets. The path to enter these markets has rapidly transformed as a stronger and clearer desire to innovate on the traditional initial public offering (“IPO”) process has arisen, with alternative structures being utilized to take private companies public and to raise capital. Among them, special purpose acquisition companies (“SPACs”) have recently emerged to dominate the capital markets scene, with the volume and size of SPAC IPOs and business combinations completed by SPACs reaching record high levels in 2020 and the first half of 2021.

A SPAC is a shell company with no commercial operations, which is formed by a sponsor to raise capital through an IPO for the purposes of financing the acquisition of a private operating company within a specified timeframe, typically 18 to 24 months following the SPAC’s IPO. The target company being acquired is taken public via the business combination of the two entities. If the SPAC fails to close the business combination before its expiration date or permitted extension, the investors’ capital will be returned and the SPAC will be liquidated. Whilst to date SPACs have mostly been a U.S. phenomenon, SPAC activity has gradually gained traction in other geographic areas including Europe and the United Kingdom, with financial centers like Amsterdam, Frankfurt and London positioning themselves to best capture this emerging trend. From a sector perspective, SPACs have increasingly targeted acquisitions in high-growth industries and have rapidly become an integral part of fast-evolving sectors, including the fintech sector. A few high-profile fintech companies have recently gone public via a SPAC, and a growing number of fintech companies have reportedly been considering the SPAC route when weighting their options to go public. Many SPACs view the fintech sector as ripe for successful business combinations due to the large supply of mature and highly valued fintech companies eyeing the public markets, as well as the accelerated growth of many fintech companies and the increased demand for fintech services and products driven by rapid changes in customer behavior in the aftermaths of the recent Covid-19 pandemic.

The surge in popularity of SPACs and the significant growth in SPAC activity have brought heightened scrutiny from regulators in the United States, the United Kingdom and Europe. In recent months, the U.S. Securities and Exchange Commission has initiated a number of SPAC-related enforcement actions and has issued several public statements and regulatory investor guidance on issues pertaining to SPACs, while the U.S. Congress has begun to hold hearings on SPACs. In parallel, the European Securities and Markets Authority has published disclosure and investor protection guidance on SPACs. The regulatory framework for SPACs in the United Kingdom has also rapidly evolved during the last few months as UK regulators have gone to great lengths to demonstrate their commitment to ensuring their public markets remain competitive listing venues, while at the same time introducing various measures aimed at strengthening the protection for investors in SPACs and increasing market efficiency and transparency in connection with SPAC activity.

Despite the recent slow-down in U.S. SPAC transactions driven in part by growing concerns around SPAC-related litigation risks and increased regulatory scrutiny, the pace of SPAC activity is expected to remain at a high level in the months to come, with more SPACs launching and expanding internationally into non-U.S. markets including in the United Kingdom and Europe. SPAC activity in the fintech sector, in particular, is expected to progress at a steady pace in light of the sector’s strong revenue and growth projections, the anticipated wave of fintech companies reaching profitability, as well as a renewed appetite for a variety of fintech products and services.

Interestingly, latest SPAC issuances have broadened the range and improved the makeup of the sponsors to include more institutional and high-reputable market participants, thus further legitimizing the SPAC process. The influx of large private equity and venture capital firms and seasoned managers with wellproven track records, coupled with better alignment of sponsors’ incentives and investors’ returns, has contributed to boost investor confidence, thus enabling SPACs to raise significant capital to use for acquisitions of larger and more mature target companies. Additionally, the high-profile companies that have recently gone public via a SPAC have helped accelerate the momentum and have lent increased credibility to the SPAC structure. The SPAC market has also benefitted from a more diversified and larger pool of institutional investors, which have progressively entered the space showing increased interest in growth industries and significant appetite for suitable returns in volatile markets.

More recent SPACs have started targeting a wider range of acquisitions. A number of sophisticated SPACs’ sponsors are now increasingly looking for larger and more mature companies, are progressively reducing the equity they receive in exchange for striking a merger and are planning to use a sizeable portion of the equity raised to fund growth. These sponsors tend to remain more closely involved with their target companies to provide ongoing support post-closing and to strategically partner with them on the longer term. Many SPACs are also seeking to be more transparent to promote a better understanding of, and increased confidence in, their structure, including among non-traditional SPAC investors.

Looking further ahead, SPACs are expected to continue to evolve and to drive innovation in a way that will likely lead to further market practice changes, which in turn could improve markets efficiency and promote competition. More regulation of various aspects of the SPAC structure, disclosures and activities may also be coming. The deal terms of SPACs themselves are likely to continue to evolve. As SPAC transactions grow in volume and popularity and the competition increases, SPACs are expected to adopt more company-friendly structures to entice potential acquisition targets and remain an attractive option for private companies looking to go public. Moreover, as larger and more sophisticated players enter the market, more SPAC structural enhancements and variations of the typical SPAC structure are expected to be adopted with the aim of increasing investor protection, reducing closing risks and improving the
alignment of interests among the parties involved.