The Hong Kong Stock Exchange has just completed a consultation on proposals to create a listing framework for Special Purpose Acquisition Companies (SPACs).
The Exchange sought feedback during a 45-day consultation period that closed on 31 October.
The consultation follows on from Singapore Exchange’s recent announcement of new rules enabling SPACs to list on its Mainboard effective 3 September 2021, making Singapore Exchange the first major Asian exchange to offer SPAC listings, as well as changes to the listing rules in the UK to increase levels of investor protection which took effect on 10 August 2021.
A SPAC is a type of shell company that raises funds through its listing for the purpose of acquiring a business (a De-SPAC Target) at a later stage (a De-SPAC Transaction) within a pre-defined time period after listing. SPACs are typically formed by professional managers or promoters who have private equity, corporate finance and/or relevant industry experience. The SPAC investors rely on the promoters’ ability to identify a suitable target and negotiate terms for the De-SPAC Transaction that will provide them with a return on their investment.
In the US, SPACs commonly offer SPAC units to IPO investors consisting of a SPAC share and a SPAC warrant (or fraction of a SPAC warrant) stapled together. Shares are typically issued to promoters at a much lower price than the price of shares issued at the SPAC’s IPO. SPAC units trade on a stock exchange at IPO. Normally on the 52nd day following the date of the SPAC’s prospectus, SPAC units can be severed into SPAC shares and SPAC warrants and are traded separately under new stock tickers. The purpose of including SPAC Warrants in the SPAC units is to compensate IPO investors for the lack of return on their investment until a De-SPAC Transaction occurs, hence they are commonly viewed as a form of “sweetener” to investors in the SPAC IPO. Typically, proceeds raised in a SPAC offering (after fees and expenses in connection with the offering) are held in an interest-bearing trust account until the De-SPAC Transaction is completed, or until the SPAC liquidates.
If the De-SPAC Transaction is approved by SPAC shareholders, the company resulting from the transaction becomes a listed issuer in place of the SPAC. The stock ticker for the SPAC changes to reflect the name of this issuer. Usually, the De-SPAC Transaction will result in the owners of the De-SPAC Target becoming the new issuer’s controlling shareholders.
The US dominates the SPAC market globally. IPO funds raised by US-listed SPACs dramatically rose last year, from US$13.6 billion in 2019 to US$83.4 billion in 2020. In the first half of 2021, US-listed SPAC IPO proceeds exceeded the whole of 2020 amounting to US$111 billion from 358 IPOs – representing 62% of all US IPO’s by number during that period. This surge in SPAC listings has been accompanied by increased regulatory scrutiny from the SEC, which is believed to have led to a recent dampening of market sentiment towards SPACs in that jurisdiction.
As a result of its concerns over shareholder protection and disclosures standards which it considers are common to SPAC structures wherever they are listed, the Hong Kong Exchange has not attempted to replicate the US SPAC regime. Instead, it has proposed a regime tailored to the particular risks and requirements of the Hong Kong market. For example, it proposes to restrict the subscription for and trading of a SPAC’s securities to professional investors only, making its SPAC listing regime more stringent than that of the US, UK and Singapore.
This restriction would not apply to the successor company, whose securities would be freely transferable amongst all investor types.
The US and the UK do not require that a SPAC obtain independent third-party investment to complete a De-SPAC Transaction or specify any requirements for the size of that investment. However, under the Hong Kong Exchange proposal, independent third-party investment would be mandatory and must constitute at least 15 to 25 per cent of the expected market capitalisation of the successor company.
Some of the other key proposals put forward by the Hong Kong Exchange include:
- SPAC promoters must meet suitability and eligibility requirements, and each SPAC must have at least one SPAC promoter which is an SFC licensed firm holding at least 10 per cent of the promoter shares. This reflects the critical role that SPAC promoters play in identifying suitable acquisition targets and the reliance placed upon the SPAC promoters by investors.
- Promoter shares are proposed to be capped at a maximum of 30 per cent of the total number of all shares in issue as at the initial offering date; and a similar 30 per cent cap on dilution from the exercise of warrants is also proposed.
- The funds expected to be raised by a SPAC from its initial offering must be at least HK$1 billion. This will help ensure that De-SPAC Transactions will be of a sufficiently large size to result in successor companies that meet the minimum market capitalisation requirements for listing.
- If a SPAC is unable to announce a De-SPAC Transaction within 24 months, or complete one within 36 months, the SPAC must liquidate and return 100 per cent of the funds it raised (plus accrued interest) to its shareholders. The Exchange will then de-list the SPAC.
The Exchange has advised that it has formed no view on whether a SPAC regime should be implemented in Hong Kong and that submissions received during the consultation period will be taken into account before it decides upon any appropriate further action.
The Consultation paper contains a useful comparison of the features of the different SPAC regimes in the US, UK and Singapore and can be found here.
This article is general information only.