Special Purpose Acquisition Companies – Listing Regime in Hong Kong

By Rossana Chu, Ricky Ho:

The Stock Exchange of Hong Kong Limited (“Stock Exchange”) published in December 2021 the Conclusions^[1] to its Consultation^[2] of September 2021 on Special Purpose Acquisition Companies (“SPAC”), and the SPAC rules took effect on 1 January 2022 as part of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Main Board Listing Rules”).

The Stock Exchange made it clear that Hong Kong regime is more stringent than that of the United States. In this article, we attempt to summarize the relevant rules and provide some analysis on certain significant aspects in relation to the SPAC listing rules.

Typical features of a SPAC

SPAC is a listing vehicle with no substantial business or asset, and its sole purpose is to raise capital through initial public offering (“IPO”) for future acquisition or merger with a target within a certain time period. It is typically formed by professional managers (i.e. SPAC promoters) who have private equity and corporate finance experience. At the IPO, the SPAC will issue shares for subscription by investors. It may at the same time offer SPAC warrants as a form of “sweetener” in the IPO. The SPAC may introduce new investors in the acquisition. Upon completion of the acquisition or merger, the SPAC and the target will then be combined, resulting in the listing of a “Successor Company” – this is referred to as a “De-SPAC transaction“. If the SPAC does not complete a De-SPAC transaction within the specified time frame, it has to seek approval from its shareholders for an extension of the life of the SPAC, or be liquidated and the funds raised in the IPO will be returned to the SPAC investors.

Hong Kong’s SPAC regime set out in Chapter 18B of the Main Board Listing Rules^[3]

Corporate governance

• SPAC promoters: SPAC promoters must meet the Stock Exchange’s suitability and eligibility requirements. Each SPAC must have at least one promoter being a firm that holds a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license issued by the Securities and Futures Commission (“SFC”). They may subscribe for shares in the SPAC (“Promoter Shares”) and warrants (“Promoter Warrants”) but at least one such licensed promoter must hold at least 10% of the Promoter Shares.
• SPAC directors: The SPAC board must include at least two individuals licensed by the SFC to carry out Type 6 and/or Type 9 regulated activities (one of whom must be a licensed person of a SPAC promoter). Any director nominated by a SPAC promoter to the SPAC board must be an officer of the SPAC promoter.

Listing and post-IPO obligations

• Investors’ suitability: Professional investors may subscribe for SPAC shares and warrants. At the time of listing, SPAC shares and warrants must be distributed to a minimum of 75 professional investors of which at least 20 must be institutional professional investors and such institutional professional investors must hold at least 75% of the securities to be listed.
• Trading of SPAC shares and warrants: Post-IPO trading of SPAC securities are limited to professional investors only. SPAC shares and warrants can be traded separately.
• Fund raising size: Funds expected to be raised by a SPAC from its IPO must be at least HK$1 billion.
• Escrow arrangement: A SPAC must hold 100% of its IPO proceeds (excluding proceeds raised from the issue of Promoter Shares and Promoter Warrants) in a ring-fenced escrow account in Hong Kong operated by a trustee or custodian. The monies must be held in the form of cash or cash equivalents.
• Board lot size: The board lot size and subscription size must be of at least HK$1,000,000 for the SPAC shares.
• SPAC warrants: The exercise price of the SPAC warrants must be at least 15% above the issue price of the SPAC shares. The exercise period must commence after the completion of a De-SPAC transaction, and must expire not less than one year and not more than five years from the date of the completion of a De-SPAC transaction. It will only result in the issuance of shares in the Successor Company upon exercise. The number of shares to be issued upon exercise of all outstanding warrants must not exceed 50% of the total number of shares in issue.
• Promoter Shares and Promoter Warrants: Shares and warrants issued by a SPAC to any of its promoters will not have listing status. If the SPAC issues Promoter Shares and/or Promoter Warrants, the promoter must remain as the beneficial owner of such shares or warrants at the listing of the SPAC and for the lifetime of such securities. A SPAC must not issue any Promoter Shares to promoters that represent more than 20% of the total number of shares in issue as at the date of its listing. Promoter Warrants must not be issued at a price that is less than 10% of the issue price of SPAC shares at IPO and must not be exercisable during the period ending 12 months from the completion of a De-SPAC transaction.
• Dealing prohibitions: SPAC promoters and their directors and employees, SPAC directors and employees, as well as their close associates are prohibited from dealing in any of the SPAC’s listed securities prior to the completion of a De-SPAC transaction.  READ FULL ARTICLE

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Note: This material has been prepared for general information purposes only and is not intended to be relied upon as professional advice for any cases. Should you need further information or legal advice, please contact us.

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[1] https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/September-2021-Special-Purpose-Acquisition-Co/Conclusions-(Dec-2021)/cp202109cc.pdf?la=en

[2] https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/September-2021-Special-Purpose-Acquisition-Co/Consultation-Paper/cp202109.pdf?la=en

[3] https://en-rules.hkex.com.hk/sites/default/files/net_file_store/HKEX4476_5770_VER18989.pdf