Luxembourg is no exception to this trend. Over the past three years, in several SPAC operations, either the base or the target entity was a Luxembourg company. Thanks to its location and advantageous regulatory framework in terms of company and listing law, the Grand Duchy is undoubtedly an ideal jurisdiction for new SPACs.
WHAT IS A SPAC?
Also known as “blank cheque companies”, SPACs offer private companies a unique means of accessing public markets. Although they are generally structured in the same way as traditional private equity funds, they fall outside the scope of Directive 2011/61/EU on alternative investment fund managers (AIFMD) because they (1) pursue a commercial objective, (2) do not have a defined investment policy and/or (3) are considered a “holding company” within the meaning of Article 4(1)(o) of the AIFMD.
In its AIFMD Q&A of December 2022, ESMA points out that “the structure of SPAC transactions is complex and there are significant variations between the general structure of the vehicles concerned and the concrete terms of their transactions”. SPACs must therefore be assessed on a case-by-case basis to observe whether they meet the criteria of the AIF definition in the AIFMD.
When a SPAC is listed on the stock exchange as part of an IPO, investors in that SPAC are invited to entrust their funds to a company that has no real commercial activity and no track record. Investor status is relatively easy to acquire as long as the person has access to the financial markets.
The SPAC is merely a hedge that serves as a pretext for reaching a target company. In general, it has eighteen to twenty-four months to find a suitable target company. If the SPAC fails to find a target within the allotted time, investors can either (1) collect the funds raised, or (2) vote for an extension of the deadline. On the other hand, if they do not approve the chosen target company and prefer to exit the structure, investors can buy back the shares they acquired in the previous IPO to be reimbursed before the acquisition takes place.
During the process, investors place their trust in a sponsor capable of raising sufficient funds. They must identify the first target’s sector of activity, as well as the place where it will be listed. Subsequently, the investors contribute funds in an amount roughly equivalent to fifty times the sponsors’ initial stake. The funds are then placed in escrow while the SPAC acquires a first target. The investors do not know the target to be acquired when they contribute their capital, only the target sector.
FOCUS ON LUXEMBOURG
While the activity has slowed down slightly in recent months due to inflation, Luxembourg remains a prime location for SPACs. The legal system offers a reliable corporate law environment. As a pillar of the European financial system, the Grand Duchy provides political and economic stability, as well as cross-border legal and business expertise. The Luxembourg authorities are familiar with dealing with SPACs. What is more, a number of such companies are already listed on the country’s stock exchange.
HOW CAN TGLF HELP YOU SET UP A SPAC?
Thanks to our expertise in the Luxembourg market, our team offers comprehensive support in relation to SPACs. Whether it is structuring, setting up the entity, advising on the choice of service providers or drafting relevant documents, TGLFs will meet your needs.
CONCLUSION
Recently, SPACs have emerged as an efficient tool to acquire private companies. They offer a number of advantages, especially flexibility it provides in raising funds for sponsors. Such flexibility is important given the high value of the target entities. Moreover, SPACs generally do not restrict investor eligibility, whereas a traditional IPO is reserved for institutional investors. Finally, SPACs considerably reduces the time needed for the acquisition of the target company.
Luxembourg being an optimal choice for launching a SPAC project, TGLF would be glad to advise you on the matter.
THE GOVERNANCE LAW FIRM
