Introduction

A special purpose acquisition company (“SPAC”) is a company with no commercial operations that is formed for the sole purpose of raising capital through an initial public offering (“IPO”) with the intention of merging with another private company.

On 1 March 2021, the Securities and Futures Commission (“SFC”) and The Stock Exchange of Hong Kong Limited (“HKEx”) briefed a forum of top financial leaders in Hong Kong about the latest developments in SPAC. Hong Kong’s Financial Secretary Paul Chan directed the SFC and HKEx to study the feasibility of listing SPAC in Hong Kong. The aim is to embrace the new fundraising arrangements without compromising on Hong Kong’s reputation regarding investor protection.

Allowing the listing of SPAC is a bold move that is consistent with our branding as a world class financial centre, but there are plenty of obstacles. This article discusses the opportunities and threats in allowing listing of SPAC in Hong Kong.

Characteristics of SPAC

The main difference between a SPAC and other companies listing through traditional IPOs is that SPAC have no commercial operations at the time of listing. The only purpose of listing a SPAC is to raise funding for its business combination, merger with, or acquisition of, other private operating companies post-IPO such that those private operating companies would be able to sidestep the traditional lengthy and costly IPO process. The post-IPO acquisition of or business combination with private companies by a SPAC is generally known as the “de-SPAC transaction”.

A sponsor, seeking to acquire or merge with an existing private company or asset, will go through the process of getting the SPAC underwritten, registered, and traded publicly. The sponsor will seek investors to purchase common stock and warrants during roadshows and will sell these units for a set price during IPO.

Once the SPAC IPO is completed, the search for the intended target begins. If the SPAC finds its target and signs a merger agreement, it will announce the planned acquisition. The transaction is then put to a shareholder vote, where investors can approve or vote down the deal. Following shareholder approval, the deal closes. If the shareholders of a SPAC do not approve of the proposed merger, or the SPAC term expires, then the IPO capital must be returned to the investors.

Opportunities

SPAC will create an abundance of opportunities in Hong Kong.

Firstly, given that there will be no historical data or audited financial statements for the newly formed SPAC, the process of getting the SPAC underwritten, registered, and traded publicly will be more efficient, less time consuming and significantly less costly than a traditional IPO.

Secondly, when merging with a SPAC, the target company can “hammer out” the initial valuation directly with the SPAC sponsors instead of relying on the last-minute pricing discussions between underwriters and large institutions in an IPO.

Thirdly, by merging with a listed shell, companies can sidestep the costly IPO process. “At-risk capital” is limited to filing fees, professional fees for lawyers and accountants, and only half the underwriting commissions for the SPAC IPO—the other half of those commissions being incurred only if and when the SPAC consummates a successful merger.

All in all, the SPAC market can be a quick way to raise capital and may provide more deal and pricing certainty in a volatile capital market, especially during the pandemic, as SPAC is a shell with no need to conduct an extensive in-person roadshow.

Threats

SPAC transactions come with their own set of unique threats and challenges, and it is essential for entities to have an understanding of the risks associated with these investment vehicles.

The quality of information disclosure constitutes one of the major concerns of the regulators of Hong Kong. Hong Kong adopts a disclosure-based listing regime under the traditional IPO, which means if a company wants to list in Hong Kong, the company would have to disclose everything from past records to profit forecasts. However, shell listings of SPAC would involve transactions or arrangements that circumvent the requirements usually applicable to a new listing applicant, including: (i) initial listing criteria under the HKEx Listing Rules, such as suitability for listing, financial eligibility criteria, and sufficiency of public interest in the business of the company; and (ii) obligations such as disclosure and due diligence requirements. When shell listings of SPAC are hard to regulate, its activities can undermine the integrity and quality of the financial market, and may affect investors’ confidence and market’s reputation.

Shareholders will also be in a disadvantageous situation compared to the United States of America given that Hong Kong lacks class action or a “no win, no fee” litigation system. A class action allows a group of minority shareholders to sue against a listed company. And under a “no win, no fee” arrangement, they will not face any legal charges if their cases are unsuccessful. Without class action or a “no win, no fee” litigation system, investors can only rely on the SFC on regulatory enforcement, which will be an indirect approach and not an immediate threat to the companies.

Conclusion

The SPAC market can potentially generate huge revenues and business opportunities for Hong Kong, but Hong Kong must establish a robust system in the regulation of SPAC to retain its stellar reputation as a world class financial centre and in investor protection. Retail investors will be the most disadvantaged, if there is insufficient shareholder protection in the legal and regulatory system.