HKEx Consultation Paper on Special Purpose Acquisition Companies

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”).

A SPAC is 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 (a De-SPAC Transaction) within a pre-defined time period after listing.

The key proposals in the Consultation are set out below:-

Pre De-SPAC Transaction Proposals

• Investor Suitability: the subscription for and trading of a SPAC’s securities would be restricted to professional investors only. This restriction would not apply to the trading of the Successor Company¹ shares post the De-SPAC Transaction;
• SPAC Promoters²: SPAC Promoters must meet suitability and eligibility requirements, and each SPAC must have at least one SPAC Promoter which is an SFC licensed firm³ holding at least 10 per cent of the Promoter Shares⁴;
• Dilution Cap: Promoter Shares are proposed to be capped at a maximum of 30 per cent of the total number of all shares in issue as at the initial offering date; and a similar 30 per cent cap on dilution from the exercise of warrants is also proposed; and
• Fund Raising Size: the funds expected to be raised by a SPAC from its initial offering must be at least HK$1 billion.

Note that:

1. A Successor Company is the listed issuer following the completion of a De-SPAC Transaction.
2. SPAC Promoters are professional managers, usually with private equity, corporate finance and/or industry experience, who establish and manage a SPAC. They are also known as “SPAC Sponsors” in the US.
3. Firms with a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license issued by the Securities and Futures Commission.
4. Promoter Shares are a separate class to the ordinary listed SPAC shares that are convertible into the ordinary listed SPAC shares, issued by a SPAC exclusively to a SPAC Promoter at nominal consideration as a financial incentive to establish and manage the SPAC.

De-SPAC Transaction Proposals

• Application of New Listing Requirements: a Successor Company must meet all new listing requirements (including minimum market capitalisation requirements and financial eligibility tests);
• Independent Third Party Investment: this would be mandatory and must constitute at least 15 to 25 per cent of the expected market capitalisation of the Successor Company, validating the valuation of the Successor Company;
• Shareholder Vote: a De-SPAC Transaction must be approved by SPAC shareholders at a general meeting (which would exclude the SPAC Promoter and other shareholders with a material interest); and
• Redemption Option: SPAC shareholders must be given the option to redeem their shares prior to: a De-SPAC Transaction; a change in SPAC Promoter; and any extension to the deadline for finding a suitable De-SPAC Target.

Liquidation and De-listing

• Return of Funds to Shareholders: if a SPAC is unable to announce a De-SPAC Transaction within 24 months, or complete one within 36 months, the SPAC must liquidate and return 100 per cent of the funds it raised (plus accrued interest) to its shareholders. The Exchange will then de-list the SPAC.

The deadline for comments to the Consultation is 31 October 2021.

Contact us to find out more about the proposed SPAC listing regime or the current IPO requirements in Hong Kong.