Hong Kong is set to be in a more favorable position to compete for listings of blank-check companies after easing some of the rules governing the investment vehicles.
The tweaks in the regime for special purpose acquisition companies, effective Jan. 1, 2022, such as a lower minimum required backing of institutional investors, better align the incentives and economic interests of SPAC promoters with shareholders, experts said. Compared with the proposal in a public consultation started in September, Hong Kong Exchanges and Clearing Ltd. also revised the rules governing dilution on warrants, investments from private investments in public equity and mergers with target private businesses, or so-called de-SPAC transactions.
"This is welcome news for Hong Kong, especially as we have seen that there were some adjustments to the requirements," said David Liu, Hong Kong-based regional managing director and member of the Asia-Pacific management committee for risk advisory firm Kroll.
Hong Kong is the latest market jumping on the bandwagon of SPAC, an alternative to traditional IPO that allows skeleton organizations launch with the intention of buying and reverse merging with a private company. Demand for local listings among potential SPAC promoters in mainland China and Hong Kong is behind the rule changes, experts added.
Initial public offerings by SPACs were particularly popular in the U.S. in 2020 and in the first quarter of 2021. In September, Singapore greenlighted the SPAC listing framework, and elsewhere in Asia, Malaysia and South Korea already had existing rules for blank-check companies to list. By 2025, SPACs will account for up to $35 billion worth of IPO proceeds in Asia-Pacific proceeds, according to Hong Kong-based consultancy firm Quinlan & Associates.
"Prior to the announcement of these final rules, we have already been helping some clients work towards setting up the first Hong Kong SPACs," said Xiaoxi Lin, Hong Kong-based Partner at law firm Linklaters. "With the regime set to come into effect on Jan. 1, 2022, we hope to see the first SPAC listings very soon."
Response to market
Hong Kong's regime for SPACs is still stricter than other markets such as the U.S. and Singapore. Experts said earlier Hong Kong’s approach to the investment vehicles has its root in its years-long crackdown on shell companies and related market misconduct in the past.
Among the revisions in the final rules, a SPAC listing must be backed by at least 20 institutional investors, down from 30 in the Hong Kong stock exchange’s previous proposed rules announced in September. A SPAC can issue warrants that will result in up to 50% of the number of shares in issue, the same as in Singapore, and up from 30% in the proposal.
SPAC shareholders could still have the option to redeem their investment if they vote for the de-SPAC deal. The previous proposal said shareholders couldn’t.
In addition, the minimum required investment by private investments in public equity, or PIPE, now varies depending on the value of the de-SPAC target. This ranges from 7.5% to 25% for deals valuing less than HK$10 billion. A SPAC issuer can apply for waiver for deals above HK$10 billion. The proposal had a minimum of 25% across the board.
"Replacing the previous requirement to align voting and redemption with strengthened independent PIPE investment requirements is likely to make the SPAC regime more accessible to a wider range of market participants and facilitate growth of the Hong Kong SPAC market," Linklaters' Lin said.
"We will need to see if the adjustments are enough to attract activity in the Hong Kong SPAC market," Kroll’s Liu added. "Hopefully, we will see traction in 2022 for the Hong Kong SPAC market."
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