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HKEX Announced New Listing Regime for SPACs

  • Hong Kong
  • Corporate

17-01-2022

Following the consultation paper published by The Stock Exchange of Hong Kong Limited (the “HKEX”) on proposals to create a listing regime for special purpose acquisition companies (“SPACs”) in Hong Kong in September 2021 (our previous article on such consultation paper can be found here), the Hong Kong regulator, after taking into account the feedback received from the market regarding the proposals, announced on 17 December 2021 new rules for creating the SPAC regime that take effect on 1 January 2022 (the Consultation Conclusions can be found here).

It is of interest to note that the launch of the SPAC regime in Hong Kong was made against the backdrop of heightened scrutiny of SPACs in the USA where the performance of the SPACs market has recently faltered. There is high hope that the framework adopted by HKEX will give sufficient protection to market investors at large whilst providing sufficient incentives to SPAC promoters for the formation of SPACs at the outset.

With the establishment of a SPAC listing regime in Hong Kong, listing applicants now have additional flexibility to consider a “dual-track” approach to going public, whereby they may simultaneously apply to list via a customary IPO route and also approach SPAC Promoters to list via the SPAC route.

What are SPACs?

SPACs, also known as blank-cheque companies, are shell corporations established solely for raising funds through an IPO with the purpose of acquiring a private company.

In the IPO of a SPAC, investors are usually offered SPAC units consisting of a SPAC share and a SPAC warrant stapled together. Following the IPO, the proceeds from the listing are placed into a trust account. Professional manager(s) of the SPAC (the “SPAC Promoter(s)”) will have a prescribed time period (normally 24 to 36 months) to identify a target company (the “De-SPAC Target”) and merge with it (the “De-SPAC Transaction”). Once the merger is completed, the De-SPAC Target will become a listed company on HKEX (the “Successor Company”). If the SPAC fails to complete the De-SPAC Transaction within the stipulated period, the SPAC shall liquidate and all the IPO proceeds shall be returned to the SPAC investors. The incurred expenses, such as listing fees, will be borne by the SPAC Promoter(s).

A summary of the key features of the final model for the SPAC regime in Hong Kong are set out below:

Formation

SPAC Promoters

·       Each SPAC shall have:

o   at least one SPAC Promoter that is a SFC-licensed firm with a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license (the “SFC-licensed Promoter”); and

o   at least 10% of the Promoter Shares to be held by a SFC-licensed Promoter - subject to waiver on a case-by-case basis, such as when a SPAC Promoter has overseas accreditation equivalent of an SFC Type 6 and/or Type 9 license.

SPAC Directors

·       SPAC’s board shall include at least two Type 6 or Type 9 SFC-licensed individuals, at least one of whom must be a licensed person representing the SFC-licensed Promoter.

Dealing Restrictions

·       Prior to completion of a De-SPAC Transaction, the following persons and their close associates are prohibited from dealing in any of the SPAC’s listed securities:

o   SPAC Promoters, their respective directors and employees;

o   SPAC Directors; and

o   employees of the SPAC.

Conditions for Listing

Issue Price

·       Must be at least HK$10 per SPAC Share.

Fund Raising Size

·       Must be at least HK$1 billion at the time of listing.

Investor Suitability

·       Pre-De-SPAC subscription and trading of SPACs’ securities are restricted to professional investors only (i.e. both Institutional Professional Investors and Non Institutional Professional Investors as defined under the Securities and Futures Ordinance) (the “Professional Investors”).

·       Each class of SPAC securities must be held by at least 75 Professional Investors, of whom at least 20 must be Institutional Professional Investors (who must hold at least 75% of the SPAC securities).

Continuing Obligations

Escrow Account

·       SPAC must hold 100% of the gross proceeds of its initial offering (exclusive of proceeds raised from the issue of Promoter Shares and Promoter Warrants) in a ring-fenced escrow account domiciled in Hong Kong operated by a trustee or custodian (the “Escrow Account”).

·       Monies held in the Escrow Account must not be released other than to:

o   meet redemption requests of SPAC shareholders (please see section on “Redemption option” below);

o   complete a De-SPAC Transaction; or

o   return funds to SPAC shareholders when a De-SPAC Transaction cannot be completed before deadline, or upon the liquidation or winding up of the SPAC.

·       Interest / other income earned on monies held in the Escrow Account may be used by a SPAC to settle its expenses.

Redemption Option

·       SPAC shareholders shall be given the option to redeem their shares prior to:

o   a material change in (i) any SFC-licensed Promoter; or (ii) the SPAC Promoter that controls 50% or more of the Promoter Shares in issue (alternatively in the absence of which, the single largest SPAC Promoter);

o   a De-SPAC Transaction; or

o   any extension to the De-SPAC Transaction deadline.

Promoter Shares and Promoter Warrants

·       Subject to HKEX’s approval on a case-by-case basis and Successor Company’s satisfaction of objective performance targets (please see the point below), earn-out rights convertible into ordinary shares of the Successor Company after completion of the De-SPAC Transaction may be issued to SPAC Promoters.

·       Objective performance targets - the share prices of the Successor Company shall be:

o   at least 20% higher than the issue price of the SPAC Shares at listing; and

o   satisfied by reference to the volume weighted average price of the Successor Company’s shares over a period of not less than 20 trading days within a 30-consecutive-trading-day period (commencing at least 6 months after Successor Company’s listing).

Dilution Cap

·       An overall cap of 30% of the number of shares in issue for all Promoter Shares and earn-outs.

o   Promoter Shares are capped at 20%.

o   Further issuances of earn-out rights to SPAC Promoters are capped at 10%.

·       An overall cap of 50% of the number of shares in issue for aggregate warrants (i.e. SPAC Warrants and Promoter Warrants).

·       There will be no separate cap on the warrant-to-share ratio and on dilution from Promoter Warrants.

De-SPAC Transactions

Application of New Listing Requirements

·       The Successor Company is required to meet all new listing requirements, including IPO sponsor engagement to conduct due diligence, minimum market capitalisation requirements and financial eligibility.

·       Trading of the Successor Company’s securities is no longer restricted to Professional Investors only.

De-SPAC Targets

·       De-SPAC Target must have a fair market value representing at least 80% of the funds raised by the SPAC from its initial offering (prior to any redemptions).

Mandatory Independent PIPE Investment

·       Independent PIPE investments refer to independent third party investments for completing a De-SPAC Transaction that have been committed by the time of announcement of the De-SPAC Transaction.

·       A SPAC will be required to raise the following amounts from independent PIPE investors:

Minimum percentage of independent PIPE investment

Negotiated De-SPAC value

25%

below HK$2 billion

15%

HK$2 billion or more and less than HK$5 billion

10%

HK$5 billion or more and less than HK$7 billion

7.5%

HK$7 billion or more

 

·       At least 50% of the independent PIPE referred to above must come from at least three sophisticated investors, each being an asset management firm with assets under management of at least HK$8 billion or a fund of a fund size of at least HK$8 billion.

Shareholder Vote

·       A De-SPAC Transaction and PIPE investment must be approved by SPAC shareholders, excluding the SPAC Promoters and other shareholders with a material interest, at a general meeting (but not through a written shareholders’ approval).

Open Market in Successor Company’s Shares

·       Successor Company must ensure:

o   an adequate spread of holders of its shares of at least 100 Professional Investors;

o   at least 25% of its total number of issued shares are at all times held by the public; and

o   not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders.

Prescribed Deadline

·       Announcement of the De-SPAC Transaction must be published within 24 months of the date of SPAC’s listing, with a six-month-maximum extension available at HKEX’s discretion.

·       A SPAC must complete a De-SPAC Transaction within 36 months of the date of its listing.

Liquidation and De-listing

Trade Suspension

·       HKEX may suspend the trading of a SPAC which:

o   fails to obtain the requisite approvals in respect of the continuation of the SPAC following a material change; or

o   fails to meet any of the prescribed or extended deadlines.

Return of Funds to Shareholders

·       Within one month of the trade suspension, the SPAC must return the funds raised to its shareholders on a pro rata basis, for an amount per SPAC Share not less than the price at which the SPAC Shares were issued at the SPAC’s initial offering.

 

Formation

SPAC Promoters

·       Each SPAC shall have:

o   at least one SPAC Promoter that is a SFC-licensed firm with a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license (the “SFC-licensed Promoter”); and

o   at least 10% of the Promoter Shares to be held by a SFC-licensed Promoter - subject to waiver on a case-by-case basis, such as when a SPAC Promoter has overseas accreditation equivalent of an SFC Type 6 and/or Type 9 license.

SPAC Directors

·       SPAC’s board shall include at least two Type 6 or Type 9 SFC-licensed individuals, at least one of whom must be a licensed person representing the SFC-licensed Promoter.

Dealing Restrictions

·       Prior to completion of a De-SPAC Transaction, the following persons and their close associates are prohibited from dealing in any of the SPAC’s listed securities:

o   SPAC Promoters, their respective directors and employees;

o   SPAC Directors; and

o   employees of the SPAC.

Conditions for Listing

Issue Price

·       Must be at least HK$10 per SPAC Share.

Fund Raising Size

·       Must be at least HK$1 billion at the time of listing.

Investor Suitability

·       Pre-De-SPAC subscription and trading of SPACs’ securities are restricted to professional investors only (i.e. both Institutional Professional Investors and Non Institutional Professional Investors as defined under the Securities and Futures Ordinance) (the “Professional Investors”).

·       Each class of SPAC securities must be held by at least 75 Professional Investors, of whom at least 20 must be Institutional Professional Investors (who must hold at least 75% of the SPAC securities).

Continuing Obligations

Escrow Account

·       SPAC must hold 100% of the gross proceeds of its initial offering (exclusive of proceeds raised from the issue of Promoter Shares and Promoter Warrants) in a ring-fenced escrow account domiciled in Hong Kong operated by a trustee or custodian (the “Escrow Account”).

·       Monies held in the Escrow Account must not be released other than to:

o   meet redemption requests of SPAC shareholders (please see section on “Redemption option” below);

o   complete a De-SPAC Transaction; or

o   return funds to SPAC shareholders when a De-SPAC Transaction cannot be completed before deadline, or upon the liquidation or winding up of the SPAC.

·       Interest / other income earned on monies held in the Escrow Account may be used by a SPAC to settle its expenses.

Redemption Option

·       SPAC shareholders shall be given the option to redeem their shares prior to:

o   a material change in (i) any SFC-licensed Promoter; or (ii) the SPAC Promoter that controls 50% or more of the Promoter Shares in issue (alternatively in the absence of which, the single largest SPAC Promoter);

o   a De-SPAC Transaction; or

o   any extension to the De-SPAC Transaction deadline.

Promoter Shares and Promoter Warrants

·       Subject to HKEX’s approval on a case-by-case basis and Successor Company’s satisfaction of objective performance targets (please see the point below), earn-out rights convertible into ordinary shares of the Successor Company after completion of the De-SPAC Transaction may be issued to SPAC Promoters.

·       Objective performance targets - the share prices of the Successor Company shall be:

o   at least 20% higher than the issue price of the SPAC Shares at listing; and

o   satisfied by reference to the volume weighted average price of the Successor Company’s shares over a period of not less than 20 trading days within a 30-consecutive-trading-day period (commencing at least 6 months after Successor Company’s listing).

Dilution Cap

·       An overall cap of 30% of the number of shares in issue for all Promoter Shares and earn-outs.

o   Promoter Shares are capped at 20%.

o   Further issuances of earn-out rights to SPAC Promoters are capped at 10%.

·       An overall cap of 50% of the number of shares in issue for aggregate warrants (i.e. SPAC Warrants and Promoter Warrants).

·       There will be no separate cap on the warrant-to-share ratio and on dilution from Promoter Warrants.

De-SPAC Transactions

Application of New Listing Requirements

·       The Successor Company is required to meet all new listing requirements, including IPO sponsor engagement to conduct due diligence, minimum market capitalisation requirements and financial eligibility.

·       Trading of the Successor Company’s securities is no longer restricted to Professional Investors only.

De-SPAC Targets

·       De-SPAC Target must have a fair market value representing at least 80% of the funds raised by the SPAC from its initial offering (prior to any redemptions).

Mandatory Independent PIPE Investment

·       Independent PIPE investments refer to independent third party investments for completing a De-SPAC Transaction that have been committed by the time of announcement of the De-SPAC Transaction.

·       A SPAC will be required to raise the following amounts from independent PIPE investors:

Minimum percentage of independent PIPE investment

Negotiated De-SPAC value

25%

below HK$2 billion

15%

HK$2 billion or more and less than HK$5 billion

10%

HK$5 billion or more and less than HK$7 billion

7.5%

HK$7 billion or more

 

·       At least 50% of the independent PIPE referred to above must come from at least three sophisticated investors, each being an asset management firm with assets under management of at least HK$8 billion or a fund of a fund size of at least HK$8 billion.

Shareholder Vote

·       A De-SPAC Transaction and PIPE investment must be approved by SPAC shareholders, excluding the SPAC Promoters and other shareholders with a material interest, at a general meeting (but not through a written shareholders’ approval).

Open Market in Successor Company’s Shares

·       Successor Company must ensure:

o   an adequate spread of holders of its shares of at least 100 Professional Investors;

o   at least 25% of its total number of issued shares are at all times held by the public; and

o   not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders.

Prescribed Deadline

·       Announcement of the De-SPAC Transaction must be published within 24 months of the date of SPAC’s listing, with a six-month-maximum extension available at HKEX’s discretion.

·       A SPAC must complete a De-SPAC Transaction within 36 months of the date of its listing.

Liquidation and De-listing

Trade Suspension

·       HKEX may suspend the trading of a SPAC which:

o   fails to obtain the requisite approvals in respect of the continuation of the SPAC following a material change; or

o   fails to meet any of the prescribed or extended deadlines.

Return of Funds to Shareholders

·       Within one month of the trade suspension, the SPAC must return the funds raised to its shareholders on a pro rata basis, for an amount per SPAC Share not less than the price at which the SPAC Shares were issued at the SPAC’s initial offering.