Hong Kong SPACs Open Only to Professional Investors: Proposed Rules
The rules for listings of Special Purposes Acquisition Companies (SPACs) in Hong Kong would be more stringent than in the US and open only to professional investors under draft rules released by the Hong Kong Stock Exchange.
Given Hong Kong’s stock market is more dominated by retail investors than the market in the US, the risk to investors is particularly heightened, the exchange believes. The US regulatory environment also places greater emphasis upon investors’ ability to launch private litigation, which is not so appropriate in Hong Kong, the exchange believes.
As such, it believes professional investors are better placed to assess, monitor and mitigate the combination of risks associated with SPACs, 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 within a pre-defined time period after listing.
The definition of professional investors for the purpose of the proposals would include both institutional professional investors and individual professional investors.
Among the other proposals released for comment are:
The funds expected to be raised by a SPAC from its initial offering must be at least HK$1 billion
The subscription and trading of a SPAC’s securities will be restricted to Professional Investors only
A Successor Company will need to meet all new listing requirements (including IPO Sponsor engagement to conduct due diligence, minimum market capitalisation requirements and financial eligibility tests)
A De-SPAC Transaction must be made conditional on approval by the SPAC’s shareholders at a general meeting.
A cap on the Promoter Shares at 20% of the total number of shares the SPAC has in issue as at initial offering date, with further issuances of Promoter Shares up to 10%
SPAC Promoters must meet suitability and eligibility requirements
Any material change in SPAC Promoters would require approval by a special resolution of shareholders (excluding the SPAC Promoter and close associates). A redemption right must be made available to shareholders voting against such material change.
Hong Kong follows Singapore and the UK in aiming to develop proposals specifically for SPAC offerings. The SGX published its “Consultation Paper on Proposed Listing Framework for Special Purpose Acquisition Companies” on 31 March 2021, while the UK’s Financial Conduct Authority published its conclusions to an earlier Consultation Paper on 27 July 2021. Its revised SPAC rules and guidance took effect on 10 August 2021.
The proposals follow a surge in interest in SPAC listings around the world, although a slight drop in the US following a series of regulatory interventions. In 2020, there were two SPAC listings in the UK and two on other European exchanges. However, in the first half of 2021 two SPACs listed in the UK and 15 listed in other parts of Europe. The SEC has raised significant concerns over disclosure issues in SPACs in the US. One advantage of SPACs over traditional IPOs is that safe harbor for forward-looking statements applies to de-SPAC transactions but not conventional IPOs.
Such differences in liability protections gave cause for the SEC to remain “vigilant about SPAC and private target disclosure so that the public can make informed investment and voting decisions about these transaction”, John Coates, Acting Director of the SEC’s Division of Corporation Finance said in April.
The exchange, a wholly-owned subsidiary of HKEX, invites written comments on the matters discussed in the paper on or before 31 October 2021. It has also invited interested parties to respond to the Consultation Paper by completing and submitting a questionnaire on the HKEX website.