Hong Kong seeks compromise on local SPAC provisions

This requirement appeared in the proposed rules for Singapore’s local SPAC regime only to be excluded from the final guidelines. Hong Kong’s consultation document was released later, and despite industry participants warning that the redemption stipulation ran contrary to investor mindset and could undermine sponsor confidence in the ability to get deals done, it still featured.

In the US, hedge funds regard SPACs as an opportunity to lend money to a company for the period it takes to find a merger target, at low or no interest, and get a warrant in return. They commit knowing they will receive the warrant, which converts into equity, even if they redeem.

It is not the only area of compromise in the rules issued by Hong Kong Exchanges & Clearing (HKEx), which come into effect on January 1. SPAC offerings must still be at least HK$1 billion ($128.5 million) in size, sponsors must meet certain criteria, and participation is limited to professional investors, of which there must be at least 75.

However, the minimum number of institutional investors has been reduced from 30 to 20. This change follows concerns that individual positions in smaller offerings would be so diluted, key investors would not be interested.

The bar has also been lowered for de-SPAC processes. Although PIPEs remain mandatory, the requirement that they must constitute at least 25% of the market capitalization of the merged entity up to HK$1.5 billion has been replaced by sliding scale. It remains 25% for market capitalizations below HK$2 billion but falls to 7.5% above HK$7 billion and might be waived above HK$10 billion.

However, to compensate for the removal of the redemption stipulation, HKEx is calling for greater institutional participation in the PIPE. The proposal said that one independent asset manager with at least HK$1 billion in assets must own at least 5% of the share on completion of the de-SPAC. Now, three or more investors with at least HK$8 billion in assets must account for 50% of the PIPE.

This is intended “to provide a stronger regulatory check on the terms and valuation of the de-SPAC.” Even with the threshold set at HK$1 billion, industry participants claimed that only a few very large enterprises from China, most likely state-owned, would fulfill the requirements.

Other changes from the initial guidance relate to the composition of SPAC boards and the number of warrants a SPAC can issue as a percentage of overall shares. The latter is favorable in terms of sponsor economics.

Several additional areas have not been modified, despite requests. For example, the merged entity must meet the same requirements that apply to all newly listed companies, which negates the speed advantage of a SPAC process over a traditional IPO.

Speaking at the AVCJ Private Equity & Venture Forum last month, Christina Bao, a managing director and co-head of sales and marketing at HKEx, said there was no desire to go “too freestyle” on the rules.

“We want to make sure we are balancing the interests of different players – promoters with financial incentives, SPAC investors, PIPE investors in the de-SPAC, and other investors,” Bao said. “We want to put safeguards around our SPAC regime.”

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