Hong Kong consults on listing framework for special purpose acquisition companies (SPACs)
On 17 September 2021, The Stock Exchange of Hong Kong Limited (Exchange) published a consultation paper seeking market feedback on proposals to create a listing regime for SPACs in Hong Kong.
A SPAC is a type of shell company, established and managed by professional managers who have private equity, corporate finance and/or relevant industry experience (SPAC Promoters, known as “SPAC Sponsors” in the United States (US)), for the purpose of raising funds through its listing for acquiring a business (De-SPAC Target) at a later stage within a pre-defined time period after listing (De-SPAC Transaction). The listed issuer resulting from the completion of a De-SPAC Transaction is a Successor Company.
The Hong Kong approach
Instead of replicating the US SPAC regime, the Exchange proposes to provide a high entry point for SPAC listing applicants and De-SPAC Targets, aiming at listing of SPACs that have experienced and reputable SPAC Promoters that seek good quality De-SPAC Targets.
A notable difference from the US regime is that the Exchange proposes to restrict the subscription for, and trading of, a SPAC’s securities to professional investors (as defined in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO)) only.
The key proposals for a Hong Kong SPAC listing regime are summarised below.
Consultation period will end on 31 October 2021.
At listing of a SPAC
At listing and for the lifetime of the SPAC:
At the time of listing, a SPAC must distribute:
Promoter Shares are shares issued by a SPAC exclusively to a SPAC Promoter at nominal consideration as a financial incentive to establish and manage the SPAC. A SPAC Promoter must, at the date of listing of the SPAC and thereafter, remain as the beneficial owner of such Promoter Shares issued to it.
A SPAC must not allot, issue or grant Promoter Shares to the SPAC Promoters that represent more than 20% of the total number of shares the SPAC has in issue as at the date of listing. The Exchange may allow a SPAC to issue additional Promoter Shares to the SPAC Promoters after completion of the De-SPAC Transaction subject to the Successor Company meeting certain performance targets (i.e. earn-outs), provided that the total number of Promoter Shares (including the earn-out portion) will represent not more than 30% of the total number of shares the SPAC has in issue at the date of its listing.
SPAC Shares for which a listing is sought must have:
If the Promoter Shares are convertible into SPAC Shares, such conversion shall be on a one-for-one basis only.
Issue or grant of all warrants by a SPAC must be subject to the prior approval of:
Each warrant issued or granted by a SPAC must entitle the holder to not more than a third of a share of the SPAC (or of the Successor Company).
The number of SPAC Shares that may be issued upon exercise of all outstanding warrants issued or granted by a SPAC must not exceed 30% of the number of shares in issue at the time such warrants are issued.
Warrants must not be exercisable before completion of a De-SPAC Transaction.
Promoter Warrants are warrants issued by a SPAC exclusively to a SPAC Promoter who must remain as the beneficial owner of such Promoter Warrants at the date of listing of the SPAC and thereafter.
The number of SPAC Shares that may be issued upon exercise of all outstanding Promoter Warrants issued or granted by a SPAC must not exceed 10% of the number shares in issue at the time such warrants are issued.
Promoter Warrants must not be exercisable during the period ending 12 months from the date of the completion of a De-SPAC Transaction.
The majority of directors of a SPAC must be officers (as defined under the SFO) of the SPAC Promoters representing the respective SPAC Promoters who nominate them.
SPAC IPO sponsor engagement
SPAC listing applicants should engage a sponsor in connection with its listing application. The sponsor should conduct due diligence to determine whether the SPAC Promoter and the SPAC’s internal controls meet Listing Rule requirements prior to the submission of a “substantially complete” listing application in accordance with Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC and Practice Note 21 of the Listing Rules.
A SPAC listing application should be submitted no earlier than one month (instead of two months for other types of new listing applications or a De-SPAC Transaction) after the date of the formal appointment of the sponsor.
Trading arrangements and restrictions on dealing in SPAC securities
The Exchange proposes to allow the separate trading of SPAC Shares and SPAC Warrants from the date of initial listing onwards, subject to having measures in place to mitigate the risks of extreme volatility and a disorderly market.
SPAC Promoters (including their directors and employees), SPAC directors and SPAC employees, and their respective close associates are prohibited from dealing in any of the SPAC’s securities prior to the completion of a De-SPAC Transaction.