HKEX Publishes Consultation Paper on Listing Regime for SPACs

• Hong Kong

• Equity Capital Markets

23-09-2021

On 17 September 2021, The Stock Exchange of Hong Kong Limited (the “HKEX”) published a consultation paper seeking market feedback on proposals to create a listing regime for special purpose acquisition companies (“SPACs”) in Hong Kong (the “Consultation Paper”). The Consultation Paper can be found here.

Listing via a SPAC has been one of the hottest topics in the global financial market. IPO funds raised by US-listed SPACs rose significantly from US$13.6 billion in 2019 to US$83.4 billion in 2020, which represented an increase of approximately 613% within a short period of 12 months. Earlier this year, both the UK and Singapore issued their own consultation papers on their own SPACs listing regulatory framework. The Consultation Paper shows HKEX’s commitment to enhance the competitiveness of the stock market in Hong Kong and to maintain Hong Kong’s position as one of the major IPO venues in the world.

1. 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).

SPAC listing is often perceived to be an attractive listing route that provides reduced time to listing, higher price certainty and transparency compared to a customary IPO. With the establishment of a SPAC listing regime in Hong Kong, listing applicants will 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.

2. HKEX's proposed approach to SPAC listings

The HKEX has proposed a stricter approach to SPAC listings, compared to that of the United States. In the Consultation Paper the HKEX explains its approach as aiming to ensure the reputation of its markets and safeguard the interests of investors. A summary of the Consultation Paper’s key proposals is set out below:

A. Pre-De-SPAC key proposals

• Investor Suitability: the subscription and trading of SPACs’ securities will be restricted to "professional investors" (as defined under the Securities and Futures Ordinance) only, which is different to the regime in the US, UK and Singapore where both retail and professional investors are able to subscribe for the SPAC IPO. A SPAC shall distribute each of its SPAC shares and SPAC warrants to a minimum of 75 professional investors, of which 30 must be institutional professional investors. Also, a SPAC shall distribute at least 75% of each of its SPAC shares and SPAC warrants to institutional professional investors. Only after a De-SPAC Transaction will retail investors be allowed to trade and invest in the securities of the Successor Companies.
• SPAC Promoters: SPAC Promoters shall meet certain suitability and eligibility requirements, including the requirements for each SPAC to have at least one SPAC Promoter that is an SFC-licensed firm with a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license and holding at least 10% of the promoter shares, which are a separate class to the ordinary listed SPAC shares. These promoter shares may be convertible into the ordinary listed SPAC shares and are issued by a SPAC exclusively to a SPAC Promoter.
• Dilution Cap: the promoter shares are proposed to be capped at 20% of the SPAC's total number of shares in issue at the IPO date, with further issuances of promoter shares up to 10% subject to the Successor Company meeting set performance targets. A similar 20 to 30% cap on dilution from exercise of warrants is also proposed.
• Fund Raising Size: the funds expected to be raised from a SPAC listing shall be at least HK$1 billion.

• Application of New Listing Requirements: the Successor Company is required to meet all new listing requirements under the Listing Rules, including IPO sponsor engagement to conduct due diligence, minimum market capitalisation requirements, financial eligibility tests etc.
• Independent Third Party Investment: this would be mandatory. The Successor Company (i) shall have at least 25% of its expected market capitalisation held by independent private investments in public equity (“PIPE”) investors (or at least 15%, if the Successor Company’s expected market capitalisation at listing is over HK$1.5 billion); and (ii) result in at least one asset management firm or fund, managing assets/ funds of at least HK$1 billion, beneficially holding at least 5% of the issued shares of the Successor Company at the IPO date.
• Shareholder Vote: the De-SPAC Transaction must be approved by SPAC shareholders at a general meeting (which would exclude the SPAC Promoters and other shareholders with a material interest).
• Redemption Option: the SPAC shareholders shall be given the option to redeem their shares prior to (i) a De-SPAC Transaction; (ii) a change in SPAC Promoter; and (iii) any extension to the deadline for finding a suitable De-SPAC Target.
• Prescribed Deadline: The SPAC is required to either publish a De-SPAC announcement within 24 months of the IPO date or complete a De-SPAC Transaction within 36 months of the IPO date, with an option to extend such period for a maximum of six months at the HKEX’s discretion
• Open Market in Successor Company Shares: a Successor Company must ensure an adequate spread of holders of its shares of at least 100 shareholders, as contrasted with the minimum 300 shareholder requirement normally required for a new listing.

The current consultation undertaken by HKEX is a significant change in Hong Kong given the ongoing problems associated with backdoor listings and shell activities that regulators have been tackling in view of the potential damage to the integrity and quality of Hong Kong’s capital markets. However, with Hong Kong feeling the pressure to follow suit as an international financial centre, the introduction of SPAC will provide an alternative listing method for issuers to consider in Hong Kong but with the appropriate investor protection and safeguards to ensure that the market quality will not be degraded.

The Consultation Paper is now open for public comments until 31 October 2021.