The future of SPACs in Hong Kong

In May 2021, we issued an article about Special Acquisition Companies “SPACs”, which can serve as an accelerated way to publicly list a company and raise further capital, compared to a traditional IPO. We list the reasoning behind the ongoing race between Singapore and Hong Kongs SPAC attraction.


SPACs can accelerate a public listing to raise capital

During the process, a newly created company, the SPAC is listed on a stock exchange (historically mostly in the US). Funds are collected from investors and the SPAC is merged with the target company (De-SPAC process). After the merger, the target company becomes the listed company and the acquisition is completed.

Our May 2021 article provides a more detailed background about the history and development of SPACs worldwide and in general, whereas the following will focus on SPACs in Hong Kong.


Development of SPACs in Hong Kong

In March 2021, the Hong Kong government instructed the two local regulators for the Stock Exchange and broker licenses, i.e. the Securities and Futures Commission (SFC) and the Hong Kong Stock Exchange (HKEX) to explore whether Hong Kong should follow the US and Singapore to allow a SPAC regime in Hong Kong. Several of the largest funding rounds in Asia, especially Mainland China, were conducted in the last few years via a SPAC. The SPAC was either set up in an offshore jurisdiction or the US which later got listed in New York. Having Mainland China in its backyard, it was only logical that Hong Kong chose to tap into this huge market. The consultation of the SFC and the HKEX was concluded in September 2021, and according to the consultation, the rules governing the listing of securities on HKEX were amended and became effective on 1st January 2022.


The process of a SPAC transaction in details

The process of a SPAC transaction can be broken down in the following steps, taking into account further local requirements in Hong Kong:


a. Formation of SPAC vehicle

The SPAC vehicle is set up by its founders, usually referred to as the “promoters”. The SPAC is generally set up in the form of a Hong Kong company, limited by shares. The promoters fund the operation of the SPAC and its running costs.

Once the SPAC is formed, the promoters submit a listing application to the HKEX, which is generally less complicated compared to an IPO, since the SPAC is currently not considered as an operational business but a shell company instead.


b. Promoters hunting for investors

The promoters will then search for investors that are able and willing to invest money in the SPAC process. It may be the case that the targetted company is known at that stage or needs to be chosen in the upcoming months. Under Hong Kong regulations, the investors must comprise of at least 75 professional investors out of which at least 20 must be institutions. Each investor can acquire “units” of the SPAC, whereas one unit usually comprises of one warrant and one common share of the SPAC.

The usual allocations of SPAC shares between the investors and the promoters are a 80:20 ratio. The proceeds that the SPAC receives, as consideration for the shares and warrants, are paid by the investors to an escrow account until the De-SPAC is completed. The minimum amount of capital that must be raised via the investors is 1 billion HKD.


c. Search for a target company

Once the fund raising is completed, the promoters will start searching for a suitable target company. This process can be compared to a traditional M&A transaction, including several due diligence checks and stages. In Hong Kong, a successor company must meet all new listing requirements of the Main Board, including engaging an IPO sponsor to conduct due diligence, meeting minimum market capitalization requirements and financial eligibility tests.

Once a suitable target is agreed upon between the promoters and the investors, the de-SPAC process begins with a SPAC shareholders’ resolution to merge the SPAC and the target. The announcement for such merger must be made within 24 months after the initial IPO and the merger must be completed within 36 months after the IPO (whereas a six-month extension can be applied for).


d. De-SPAC process

Merging the target and the SPAC refers to the De-SPAC process. The target company becomes a fully listed company after the successful merger. Following the completion of the merger comes a locked-up period of at least 12 months during which neither the investors nor the promoters are permitted to sell or dispose their shares in the company.


e. Becoming a part of HKEX

Once the merger is completed, the merged target company is subject to the general listing and reporting rules of the HKEX Main Board. Interested parties should evaluate whether the target company is already prepared and ready to comply with the listing rules before planning the SPAC process. This includes internal and external changes and controls, such as corporate governance, financial reporting, internal control, budgeting, forecasting and investor relations. DISCLAIMER: 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.