New Listing Regime for Special Purpose Acquisition Companies (SPACs) in Hong Kong

HKSE will broadly implement the proposals set out in the Consultation Paper, subject to certain amendments. Key features of the Hong Kong SPAC listing regime are set out below:

1. Professional Investors only prior to De-SPAC Transaction

HKSE adopts the proposal of limiting the subscription and trading of SPAC securities to Professional Investors¹ only prior to the De-SPAC Transaction, with additional approval, monitoring and enforcement measures to ensure compliance with such requirements. As an effective safeguard to preclude retail participation, SPAC securities are required to be traded in a minimum board lot size of HKD1 million per lot.

2. Open Market Requirement at Initial Listing

HKSE decides to reduce the minimum number of Institutional Professional Investors² at a SPAC’s initial listing from 30 (as set out in the Consultation Paper) to 20 to strike a balance between ensuring the competitiveness of Hong Kong’s SPAC listing regime and ensuring substantial institutional participation in Hong Kong SPAC listings.

A SPAC is still required to (i) distribute its securities to a minimum of 75 Professional Investors (either Institutional Professional Investors or Non-Institutional Professional Investors³); and (ii) distribute at least 75% of its securities to Institutional Professional Investors.

3. Licensing requirement of SPAC Promoter

HKSE adopts the proposal that at least one SPAC promoter be a firm that holds (i) a Type 6 (advising on corporate finance) or Type 9 (asset management) license issued by the Securities and Futures Commission (SFC); and (ii) at least 10% of the promoter shares, which are appropriate safeguards for ensuring the competency and accountability of SPAC promoters.

HKSE will grant a waiver on the SFC licensing requirement on a case-by-case basis (for example, granting a waiver to a SPAC promoter with an overseas accreditation that HKSE considers to be equivalent to a Type 6 or Type 9 license issued by the SFC).

4. Requirements of SPAC directors

HKSE removes the proposed requirement that the majority of the board of a SPAC be composed of representatives of the SPAC promoters. Instead, HKSE requires that a SPAC board include at least two Type 6 or Type 9 SFC-licensed individuals (including one director representing the SFC-licensed SPAC promoter).

5. Shareholder vote on De-SPAC transactions

HKSE adopts the proposal that a De-SPAC Transaction must be conditional on approval by the SPAC’s shareholders at a general meeting and that a shareholder and its close associates must abstain from voting on a De-SPAC Transaction if they have a material interest in the transaction. HKSE maintains the position that SPAC promoters and their close associates must abstain from voting on the De-SPAC Transaction.

However, HKSE decides to remove the proposed voting restriction on the outgoing controlling shareholder who would cease to be a controlling shareholder solely as a consequence of dilution to its shareholding through the issue of new shares to the incoming controlling shareholder resulting from the De-SPAC Transaction.

6. Removal of alignment of voting with redemption requirement

HKSE decides to remove the requirement for shareholders to vote against the De-SPAC to redeem their shares at the time of the De-SPAC Transaction, with the consequence that voting results may not accurately reflecting the shareholders’ views on the terms and value of the De-SPAC Transaction. Instead, HKSE will strengthen the requirements on independent private investment in public equity (PIPE Investment) to support the valuation of the De-SPAC target.

7. Mandatory Independent PIPE Investment

HKSE replaces the more stringent minimum Independent PIPE Investment thresholds set out in the Consultation Paper⁴ with staggered thresholds to cater for De-SPAC targets of different sizes as set out in the table below.

HKSE replaces the proposed requirement regarding significant sophisticated investment set out in the Consultation Paper⁵ with a requirement that at least 50% of the independent PIPE Investment must come from at least three institutional investors with assets under management of at least HKD8 billion.

8. Warrant dilution cap

HKSE increases the warrant dilution cap in a SPAC listing from 30% (as set out in the Consultation Paper) to 50% of the number of shares in issue at the time such warrants are issued.

9. Minimum SPAC fund raising size

HKSE adopts the requirement of a minimum HKD1 billion fund raising size, which is comparable to the requirements of other jurisdictions, with the objective of attracting SPACs that seek good quality De-SPAC targets to list in Hong Kong.

10. Application of new listing requirements

HKSE adopts the requirement that the successor company formed after a De-SPAC Transaction shall comply with all new listing requirements under Chapter 8 of the Listing Rules (which include minimum market capitalization requirements, financial eligibility tests, management continuity and ownership continuity requirements), subject to compliance with Chapters 8A (for listing with a weighted voting rights structure) and 18A (for listings of biotech companies), if applicable.

A successor company must appoint at least one independent IPO sponsor to conduct due diligence as in a traditional IPO (which is not required in the US).

The application of new listing requirements, which prevents a De-SPAC Transaction from circumventing the listing requirements through the injection of sub-standard assets and/or businesses into listed shells, has the objective of ensuring a “level playing field” between issuers who choose to list via a traditional IPO and those that choose to list via a De-SPAC Transaction.

SPAC Opportunities

The new SPAC regulations will come into force at an opportune time for Asia Sponsors and Investors.  Headwinds facing SPACs in recent months include:

• the SEC and chair Gary Gensler increasing the scrutiny of SPACs which wish to list in the US and have China operating companies as their De-SPAC targets;
• the Cyberspace Administration of China issuing new regulations which reduce the viability of Chinese tech companies being targeted by a SPAC; and
• the SEC adopting amendments to finalize rules to implement the Holding Foreign Companies Accountable Act. The law permits the SEC to ban companies from trading and be delisted from exchanges if the Public Company Accounting Oversight Board is not able to audit requested reports for three consecutive years. It also requires companies to declare whether they are owned or controlled by any foreign government.  As a result of this, companies are already looking to de-list in the US and re-list in Hong Kong.

In light of these headwinds we expect many Asia based sponsors who were considering a US listed SPAC to pivot and instead list in Hong Kong, creating an immediate demand for the new regime. As always, successful early adoption and use of the regime will increase confidence in the Hong Kong SPAC process, driving increased use and creating a positive feedback loop.

Offshore Perspective

Cayman Islands exempted companies are one of the most popular vehicle choices for SPACs due to their flexibility and adaptability to the rules of international stock exchanges and are expected to be the vehicle of choice for Hong Kong listed SPACs. Cayman Islands vehicles offer tax neutrality, regulatory flexibility, and cost efficiency for SPACs to complete De-SPAC transactions once a De-SPAC target has been identified.

With:

• an award-winning cross-jurisdictional specialist SPAC team, with team members in Hong Kong, the Cayman Islands, Bermuda and Jersey, which has been involved in many of the recent Asia sponsored SPAC listings and which is already working on a number of proposed Hong Kong SPAC listings; and
• an M&A team in Hong Kong which is led by a partner who has completed in excess of USD80 billion of M&A transactions in the last three years and been named Cayman Islands M&A lawyer of the year for the last three years running,

Appleby are uniquely placed to assist in SPAC listings on the Hong Kong, US and UK stock exchanges, using Cayman, BVI, Bermuda, Guernsey or Jersey vehicles as well as the resulting De-SPAC M&A transactions.

[1] persons falling under the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (SFO)
[2] persons falling under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO
[3] persons falling under paragraph (j) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO
[4] Under the Consultation Paper, it was proposed that independent PIPE Investment must constitute at least 25% of the expected market capitalization of a successor company, or 15% to 25% in the case of successor companies with an expected market capitalization of over HKD1.5 billion.
[5] Under the Consultation Paper, it was proposed that at least one independent PIPE investor must be an asset management firm or fund with assets under management of at least HKD1 billion, and the PIPE investment must result in the investor beneficially owning at least 5% of the issued shares of the listed issuer following the completion of a De-SPAC Transaction.