I have read about two interesting UK companies listing on the US stock market recently via special purpose acquisition companies, also known as Spacs.
If I wanted to invest in a company like online car seller Cazoo or electric vehicle maker Arrival, can I do that now it is listed on the US stock market.
Are they listed under their own names or the Spacs name?
Buying opportunity? US-listed Spacs have recently acquired UK-based companies, one of them the online car seller Cazoo
Tanya Jefferies, of This is Money, replies: Spacs are popular – and controversial – in the US but have yet to take off in a big way in the UK.
From an investor’s point of view, they can be likened to a lucky dip.
They are created and floated to raise money, then take over some as yet unidentified company, at which point shareholders finally find out what they actually own.
Interest in Spacs has been sparked in the UK recently by two US-listed Spacs separately acquiring two of our homegrown companies, Cazoo and Arrival.
Richard Hunter: Recent examples such as UK-based electric bus maker Arrival choosing the Spac route demonstrates their increasing popularity
Obviously, these Spacs have reached the stage of revealing which firms they are buying, so at least that is no longer a mystery if you buy their stocks now.
We asked a markets expert to explain how Spacs work and answer your questions below.
Richard Hunter, head of markets at Interactive Investor, replies: A ‘special purpose acquisition company’ or Spac is designed to raise money from an initial public offering with the intention of acquiring a private company within two years.
The Spac then looks for such a company, and the following ‘reverse merger’ offers this private firm quick access to capital and a route to the market that is perhaps faster and simpler than a traditional flotation.
Once the process is complete, those who bought into the Spac can keep the investment or sell once the purchase is revealed.
As such, they are known as ‘blank cheque IPOs’ and immediately fail one of the golden rules of investment: invest in what you know.
It also makes asset allocation and portfolio balancing difficult for the investor since the Spac target company may simply not be known at the outset.
A Spac flotation may be designed to tempt investors with further incentives, such as offering to sell each unit with a warrant attached, and the ability to exercise it at a future date.
What is a warrant?
A warrant would give an investor the right but not an obligation to buy more shares, perhaps at a discount, in future, writes This is Money.
However, the inclusion of warrants poses a problem for ordinary investors, because under UK rules they turn a Spac into a ‘packaged product’, which can only be sold to a high net worth or sophisticated investor.
‘High net worth’, in very broad terms, means you have an annual income of £100,000 or more, or at least £250,000 in net assets not including a primary residence or pension.
Sophisticated’ might, for example, mean that you are a director of a company with a £1million-plus annual turnover.
As a result, not all mainstream investing platforms in this country will trade the US Spacs with the warrants attached.
But warrants often expire after a certain period, such as 52 days after an IPO. And once the warrants are separated from the shares, brokers which were unwilling before can then offer access to the Spac.
The process unfolds usually over four events.
– The Spac lists under its own name and trades under that
– There is then speculation that the SPAC will buy XYZ (at this point, it still trades under the Spac name)
– The Spac announces that it will merge or take over XYZ company (still trading under the Spac name)
– The deal is completed and it is most likely that the SPAC then changes its name to the target company
There will of course be successes along the way and recent examples such as UK-based electric bus maker Arrival choosing this route demonstrates their increasing popularity – although Arrival shares are currently trading at around $16, below the IPO price of $22.
With this in mind and turning to your specific question, Arrival shares now trade on the US Nasdaq market under the ticker ARVL, having previously been trading in the Spac’s name, CIIG Merger Corporation.
The Cazoo takeover, meanwhile, is expected to complete in the third quarter of this year.
Cazoo is an online platform and deals with the used car-buying process. It enables customers to purchase and finance a car and is UK-based, with a presence also in Germany and France.
Formed in 2018, Cazoo expects to generate revenue of almost $1billion this year, although is unlikely to become profitable before 2023.
At present, the Spac trades under the name Ajax I (ticker AJAX) on the New York Stock Exchange and will trade under ‘CZOO’ on the same exchange in due course.
To answer your other question, you can buy and sell US Spacs in the normal way you would any other stock listed there, subject to any warrant being detached as explained above.
However, investors should take a long, hard look before committing to Spacs, particularly bearing in mind their own risk profile.
How do you buy overseas shares?
Want to get your hands on US Spacs or other stocks listed outside the UK – find out how it works here.
The fact that they have moved on to the radar of the Financial Conduct Authority is another noteworthy point.
The FCA recently announced that it would potentially be loosening the rules stipulating that an acquisition in the UK by a Spac was deemed a reverse takeover.
This triggers the suspension of trading in the shares of the target company until the takeover is complete.
The FCA is currently consulting on relaxing, or even waiving this rule entirely for Spacs.
At the same time, however, the regulator will be looking at the risks of Spacs, and the strength of investor protection around them.
The FCA might look at introducing new safeguards for buyers, which could set some alarm bells ringing for potential investors.
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