Hong Kong outlines plans for local SPAC listings

The proposals come weeks after Singapore issued final guidelines for local SPACs, with Boon-Chye Loh, chairman of the Singapore Exchange, telling CNBC on September 17 that a first listing application was expected within a couple of weeks. Several private equity firms have separately expressed an interest in sponsoring SPACs raised out of Singapore.

Industry participants have previously noted that the lighter-touch oversight of SPACs in the US is at odds with the approvals-oriented systems in Hong Kong and Singapore, which are intended to protect less sophisticated investors. However, these participants still expected both territories to permit SPAC offerings for fear of missing out on listings. Indonesia has also expressed a desire to create a SPAC regime.

Hong Kong SPAC offerings must be at least HK$1 billion ($128.5 million) in size, and participation in the offerings and subsequent trading would be restricted to professional investors. These are defined as individual investors and partnerships with no less than HK$8 million in portfolio assets and trust corporations with at least HK$40 million in total assets.

SPAC promoters must meet suitability and eligibility requirements, including having at least one promoter that is licensed by the Securities & Futures Commission (SFC). That promoter must hold at least 10% of the promoter shares, while the overall promoter interest in the SPAC – is capped at 30%. In the US, promoters typically subscribe to convertible warrants in the SPAC and pay a nominal sum for what becomes a 20% interest in the entity post-IPO, though there is no cap.

On completion of the merger with a target operating company, the combined entity must meet the requirements imposed on all newly listed companies, including those covering minimum market capitalization and financial eligibility. Independent third-party investors would have to account for 15-25% of the company to validate the valuation.

Proposed shareholder approval and redemption provisions are much like those in the US, including giving shareholders the right to reject a proposed merger and the right to redeem their shares prior to a merger. If a SPAC fails to announce a transaction within 24 months, or complete one within 36 months, it must be liquidated, and the proceeds returned to shareholders.

HKEx noted that SPAC fundraising in the US rose from $13.6 billion in 2019 to $83.4 billion in 2020, and then $111 billion in the first half of 2021. However, activity has since eased, which is linked to greater regulatory scrutiny of offering and combination processes. In the last three years, 12 companies from Greater China and Southeast Asia have listed in the US via SPAC mergers.

In addition to noting there is proportionally higher retail investor participation in Hong Kong’s market versus the US, while the US places greater emphasis on investors being able to pursue private legal action to curb abusive behavior, HKEx expressed concern about a demand-supply imbalance. An excess of SPACs chasing deals would lead to mergers with weak companies and sub-par outcomes.

“We acknowledge that our proposals would result in a SPAC listing regime that is more stringent than that of the US,” HKEx added in the consultation document.

“However, as has been demonstrated through our implementation of the 2018 listing reforms that enabled the listings of [pre-profit] biotech companies, issuers with WVR [weighted voting rights] structures and secondary ‘homecomings.’ this approach can result in very successful commercial and regulatory outcomes.”

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• Topics
• Greater China
• IPO
• Regulation
• Hong Kong (China)
• SPAC
• Singapore