The Hong Kong Stock Exchange (HKEx) has issued the much-anticipated consultation paper on creating a listing regime for special purpose acquisition companies (SPACs).
The listing rules of the HKEx (Listing Rules) generally prohibit the listing of shell companies. Over the years, however, it has created specific exception listing regimes to foster capital raising in Hong Kong by pre-revenue biotech companies, new economy companies with weighted voting rights structures, and certain qualified overseas listed companies, and Hong Kong has become Asia’s largest and the world’s second largest biotech fundraising hub. Now, the HKEx is seeking market feedback (to be submitted by 31 October 2021) on its proposal to create another new regime for SPAC listings in Hong Kong.
A SPAC is a cash shell company which does not have any business operations. It raises funds on a stock exchange through an initial public offering (IPO), where its sole purpose is to utilize the proceeds from the IPO to acquire a target company identified by the SPAC Promoters (known as SPAC Sponsors in the United States). The SPAC would then combine with the target company in what is known as a “De-SPAC Transaction,” resulting in a successor company being listed. In the event that a SPAC is unable to complete the De-SPAC Transaction before a deadline, the SPAC must be liquidated, with its remaining available funds returned to its shareholders who are not SPAC Promoters.
The HKEx’s proposal of a SPAC listing regime is an important step in keeping Hong Kong a competitive international financial center. SPAC listings have surged in the United States over the past few years, which also lured many Chinese and Asian companies to utilize this route for fundraising. Being an IPO market that regularly ranked first in the world in total fundraising in the past decade, the HKEx’s proposal to introduce a SPAC listing regime is long-overdue. However, as the HKEx is mindful of a higher retail market participation in Hong Kong and the risk of creating a listing market of substandard business and/or assets, it has admittedly proposed a SPAC listing regime which is more stringent than that of the United States.
Key features of the Hong Kong SPAC listing regime proposed by the HKEx are discussed below.
Although the US Securities and Exchange Commission does not impose requirements as to the minimum amount of funds to be raised by a SPAC, different stock exchanges in the United States do have minimum market capitalization requirements. The HKEx proposes that gross funds to be raised by the SPAC from its IPO must be at least HK$1 billion (approximately US$128 million), with the objective of preventing the over-supply of SPAC listings, which can in turn lead to substandard De-SPAC Transactions.
Subscription and trading of a SPAC’s securities are proposed to be made available only to professional investors, prior to the De-SPAC Transaction. This would mean that those who do not meet the definition of professional investor under Section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) will not be able to take part in the SPAC IPO and the trading of its securities until after the SPAC has completed its De-SPAC Transaction. Specifically, investors who are individuals with a portfolio of less than HK$8 million (approximately US$1.02 million) will be excluded from participation until after the SPAC completes its business combination with the target company and becomes the successor company.
This proposal is in stark contrast to the current SPAC listing regime in the United States, which has no such arrangements in place. Rather, retail investors can freely participate in the IPO of the US SPAC as well as the trading of its securities.
The HKEx proposed to impose a licensing requirement on SPAC Promoters. In Hong Kong, qualified individuals and corporations in the securities and futures markets are granted different licenses by the Securities and Futures Commission (SFC) depending on the type of regulated activity they are engaged in. Under the HKEx’s proposed SPAC listing regime, at least one of the SPAC Promoters must be a firm holding a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license issued by the SFC. Such licensing requirement of SPAC Promoters is not seen under the US SPAC listing regime. In addition, the licensed SPAC Promoter must be interested in the SPAC holding at least 10% of the Promoter Shares.
This proposal seeks to address concerns over “celebrities” endorsing SPACs that might mislead investors over the abilities of the SPAC Promoters, while it should be welcoming news to licensed firms in Hong Kong as it represents new business opportunities for them.
Under the current Listing Rules, new listings of companies on the main board of the HKEx must meet certain qualifications under Chapter 8 (Qualification for Listing). Such qualifications for listing include minimum market capitalization, financial eligibility, management continuity and ownership continuity requirements among other requirements. Under the SPAC listing regime proposed by the HKEx, the successor company formed after the De-SPAC Transaction would have to meet the listing requirements under Chapter 8 (Qualification for Listing) in full, although Chapters 8A (Weighted Voting Rights), 18 (Mineral Companies) and 18A (Biotech Companies) of the Listing Rules can still apply if applicable.
In addition, the HKEx proposes that a De-SPAC Transaction must comply with the procedures and requirements for new listing applications as set out in Chapter 9, which importantly means that an independent IPO Sponsor must be appointed to conduct due diligence as in a traditional IPO (a requirement that does not exist in the United States). Prospective listing candidates will have to consider the cost consequence of these requirements and if this proposal is finally adopted by HKEx, should consider appointment of the IPO Sponsor early in the process (at least two months prior to the listing application).
Despite concerns over the potential volatility of SPACs’ securities, generally consistent with the practice in other markets, the HKEx has proposed that SPACs would be allowed to list shares and warrants that trade separately and starting from its initial offering date (i.e., without prescribing any stabilization period after the IPO where separate trading is not yet permitted), albeit with additional measures put in place to mitigate volatility risks. Such additional measures include allowing only manual trades of SPAC warrants to reduce speculative trading, and/or allowing automatching of orders which are subject to a volatility control mechanism designed by the HKEx to prevent extreme price volatility.
The number of shares issued by a SPAC exclusively to a SPAC Promoter is proposed to be capped at 20% of the total number of shares in issue at the time of the SPAC’s IPO, while a further 10% may be issued to them subject to performance targets being met by the successor company. Presently, there is no cap placed on the number of shares which the SPAC Promoter can be issued under the US SPAC listing regime, yet such a measure proposed by HKEx is aimed at mitigating dilution risks of other shareholders.
A mandatory outside third-party investment or private investment in public equity (PIPE Investment) into the successor company is proposed by the HKEx, in which PIPE Investment must constitute at least 25% of the expected market capitalization of the successor company. If the successor company has a market capitalization at listing of more than HK$1.5 billion (approximately US$192 million), a PIPE Investment of 15% of the market capitalization of the successor company at listing will suffice. While this requirement is a stark contrast to the regime in other jurisdictions including the United States, PIPE investments are rather common in De-SPAC transactions and is reflective of the HKEx’s position to ensure SPAC targets are of high quality and standard.
In line with the current practice for listed issuers to obtain shareholders’ approval concerning sizeable transactions, the HKEx has proposed that approval by SPAC shareholders at a general meeting is mandatory for De-SPAC Transactions. SPAC Promoters and their close associates, being shareholders with material interest, are to abstain from voting on the De-SPAC Transaction. This is different from the approach in the US whereby the mandate for shareholders’ approval applies only when share issuances are involved for domestic issuers or where local corporate laws of the home jurisdictions of the SPAC or related target company require for the related transaction (such as a merger).
Current Listing Rules require issuers of a new listing to have at least 300 shareholders at the time of listing. In light of the proposed restriction that SPACs are made available only to professional investors, the HKEx has proposed that a minimum of 100 shareholders in the successor company would be enough to ensure an adequate spread of shareholders. This represents an effort to ensure the competitiveness of the Hong Kong SPAC listing regime.
Overall, the Hong Kong SPAC listing regime being proposed by the HKEx is broadly welcomed and represents a careful balance of what the HKEx stands for and the interest of the potential stakeholders involved. We expect the market will embrace and support much of the proposal and the SPAC listing regime will attract more quality Chinese, Asian, and international companies to Hong Kong.
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