SPACs to Replace IPOs: Hong Kong Exploring a SPAC Listing Regime
- Stefan Schmierer
- May 12, 2021
- 4 min read
Updated: 3 days ago
This article is co-authored by Stefan Schmierer and Kayley H
Also called blank‑check companies, SPACs (Special Purpose Acquisition Companies) are shell firms that list on a stock exchange with the sole purpose of raising capital for an acquisition. They have become an increasingly popular route for start‑ups to access public investors, while also offering significant upside for their sponsors. As interest grows globally, SPACs are increasingly viewed as an alternative to the traditional IPO process, particularly in the context of discussions around a potential SPAC listing regime Hong Kong.
What is a SPAC?
A SPAC is a company with no commercial operations, formed solely to raise capital through a SPAC‑IPO for the purpose of acquiring an existing operating business.
Invented by “Nuss” and “Miller” in 1993
Invented in 1993 by investment banker David Nussbaum and lawyer David Miller, SPACs were designed to give private firms an alternative route to public markets. The SPAC model raises funds, places them into a newly established entity, and subsequently merges with a target company.
Since summer 2020, SPAC activity has surged, bringing companies such as DraftKings Inc. and Virgin Galactic Holdings Inc. to public markets and attracting participation from high‑profile investors.
Compared to traditional IPOs, SPAC‑IPOs may offer lower upfront financial risk and faster access to capital.
SPAC‑IPOs Comparable to Backdoor Listings
SPACs are typically formed with promoters holding approximately 20% of the equity, with the remaining interest offered to public shareholders through units sold in the IPO.
Following a SPAC‑IPO, the entity usually has 18 to 24 months to identify and complete a merger. Failure to do so results in liquidation and the return of proceeds to shareholders, making the process comparable to a backdoor listing.
SPACs Worth USD 70 Billion in 2020
The SPAC boom has been most pronounced in the United States, where SPACs raised approximately USD 70 billion in 2020. In January 2021 alone, SPACs raised an additional USD 26 billion, highlighting the rapid growth of the market.
18 to 24-Month Deadline for SPAC Deals
The financial value of SPAC deals has also seen a dramatic increase. Examples include Tesla’s rival Lucid Motors with their largest SPAC deal to date at an amount of US$ 24 million. SPAC listings can also avoid volatility and uncertainties prevalent in the traditional IPO market. This is because of the requirement for SPACs to return their proceeds if they do not complete the merger and acquisition process by the 18–24-month deadline.
However, the SPAC boom has triggered fears among several groups of investors. The upward trend for demand for SPAC-IPOs come alongside the record levels of retail traders emerging within global markets. An example of the trading frenzy are stocks like GameStop Corp. and cryptocurrencies such as Bitcoin and Ethereum.
Moreover, the increase in retail investors brings a larger number of buyers with a low understanding and knowledge of investment. As a result, the increased publicity of SPACs brings risks with it, if the market is not as educated or receptive as expected. Secondly, some SPAC mergers do not fare as well as successful counterparts.
Cash Redemption and Shareholder Dilution Risks
There are further drawbacks for those looking to introduce SPACs to the market, such as the risk of uncertainty as a result of capital shortfall from potential cash redemption by investors. If redemptions exceed expectations, the liquidity of a SPAC may become uncertain and risk the future of the SPAC. Additionally, there is a risk of shareholder dilution.
Share dilution occurs when a company issues additional stock, which therefore reduces – dilutes - existing shareholders’ ownership in the company. Despite a preference for SPACs because of the fewer financial barriers, the removal of such requirements may also see potential issues later. Examples of this include restatements, incorrectly valued business assets, and even potential lawsuits.
Hong Kong Exploring SPACs Listing Regime
Despite recent discussions between financial regulators regarding whether to allow SPAC listings, the listing of such is not currently permitted in Hong Kong.
In March 2021, financial secretary Paul Chan said he had instructed the Securities Futures Commission ("SFC") and Hong Kong Exchanges and Clearing ("HKEX") to explore suitable listing regimes (including SPACs) to enhance the city’s competitiveness as a fundraising hub while safeguarding small investors.
However, a major issue particular to Hong Kong lies in securing liability insurance for SPAC directors and officers against incorrect statements and negligence in relation to business assets and performance. For the time being, although Hong Kong is welcoming the SPAC way into the public market, we may need to wait out the SPAC boom in the long run before it is implemented properly in the domestic market.
SPACs are an alternative method of access to public capital. Despite the potential drawbacks, mainly laying in the financial sphere, a SPAC listing can be a faster way for companies to go public. With a continuously increasing demand for SPACs within the United States markets, there is potential for Hong Kong to implement appropriate measures, as we might just be at the beginning of the SPAC boom.
How Ravenscroft & Schmierer Can Help?
Ravenscroft & Schmierer advises sponsors, investors, and target companies on SPAC structuring, regulatory developments, and listing strategies in Hong Kong.
If you are considering SPAC-related opportunities or monitoring regulatory changes, contact us to discuss your circumstances and available options.
FAQ: SPAC Listing Regime in Hong Kong
What is a SPAC?
A SPAC is a listed shell company formed to raise capital and merge with an operating business.
How long does a SPAC have to complete a merger?
A SPAC typically has 18 to 24 months to identify and complete a merger.
What are the main risks associated with SPACs?
Key risks include redemption risk, shareholder dilution, valuation uncertainty, and retail investor exposure.
How can Ravenscroft & Schmierer assist with SPAC matters?
Ravenscroft & Schmierer advises on SPAC structuring, regulatory analysis, and public listing strategy.
Whilst every effort has been made to ensure the accuracy of this article it is general in nature and does not constitute legal advice of any kind. You should seek your own personal legal advice before taking legal action. We accept no liability whatsoever for loss arising out of the use or misuse of this article.
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