Introduction

In our previous newsletter “The Stock Exchange published consultation paper on Special Purpose Acquisition Companies”, we discussed the consultation paper issued by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) on 17 September 2021 (the “Consultation Paper”), which sought the market’s opinion on creating a listing regime (“Proposed Rules”) for special purpose acquisition companies (“SPAC(s)”) in Hong Kong. The proposal aimed to sharpen Hong Kong’s competitive edge as the international financial centre and to attract listing applicants from the Greater China and South East Asia. In December 2021, the Stock Exchange published conclusions to the Consultation (the “Consultation Conclusions”).

New listing regime for SPACs

Upon considering the respondents’ feedback, the Stock Exchange has decided to largely implement the proposals set out in the Consultation Paper, with the following key amendments made in response to the comments of the respondents:

Open market requirement at initial listing

In order to attract sufficient interest from institutional investors and to form an open market by ensuring adequate liquidity in SPAC securities after their initial public offering (“IPO”), the Stock Exchange proposed restricting the marketing and trading of SPACs to professional investors.

Having considered that requiring a SPAC to distribute its securities to a minimum of 30 institutional professional investors (“IPI(s)”) is an overly high threshold for initial listing, the Stock Exchange has tuned down the Proposed Rules by reducing the minimum number of participating IPIs to 20 to allow additional room for commercial viability. SPACs would nevertheless be required to (i) have the IPI subscribing or holding at least 75% of the securities it issues for its IPO; and (ii) have a minimum of 75 professional investors (including both IPIs and non-institutional professional investors) in subscribing or holding the securities it issues for its IPO.

Promoter licensing requirement

The Stock Exchange maintained the proposal that at least one SPAC promoter (“SPAC Promotor”) is required to be 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 (the “SFC”) and the SPAC Promotor should at least hold 10% of the promoter shares. However, the Proposed Rules allow the Stock Exchange to consider granting waiver on a case-by-case basis for a SPAC Promotor that has overseas accreditation issued by relevant regulatory authority that is considered equivalent to an SFC Type 6 and/or Type 9 license.

It is acknowledged in the Consultation Conclusions that the discretion to allow firms which has overseas accreditation as SPAC Promotor is to include overseas SPAC Promotors with substantial experience and capability and incentivise high quality corporates and/or individuals, private equity funds and institutions who hold similar overseas accreditation to participate in the Hong Kong SPAC market. 

SPAC directors

Rather than requiring the majority of the board of a SPAC be composed of representatives of the SPAC Promoters, in the Consultation Conclusion, it is required that a board of directors of the SPAC must include at least two individuals who hold Type 6 or Type 9 SFC licence (including one director representing the licensed SPAC Promoter) to ensure the SPAC Promoter’s directors are senior management of the relevant SPAC Promoter, and have fiduciary duties of skill, care and diligence to SPAC Investors and the SPAC as a whole.

Mandatory PIPE investment

As set out in the Consultation Conclusion, to ensure sufficient regulatory safeguards on the terms and valuation of the de-SPAC transaction (i.e., the transaction whereby the listed SPAC acquires a suitable target resulting in the listing of the acquired target (the “Successor Company”)), and the level of investor interest in the Successor Company, strengthened requirements on private investments in public equity (“PIPE”) will be in place. In the context of the Hong Kong SPAC regime, PIPE generally means a fundraising exercise undertaken by SPAC from third parties for the purposes of completing a de-SPAC transaction. Regarding the size of independent PIPE investment, a SPAC will be required to raise an amount from independent PIPE investors constituting at least the percentage of the negotiated de-SPAC value as shown in the table below, with the amounts staggered to cater for different sizes of de-SPAC targets:

Further, at least 50% of the independent PIPE investment abovementioned must be contributed by at least three sophisticated investors, each being an asset management firm with assets under management of at least HK$8 billion or a fund with fund size of at least HK$8 billion.

Warrant dilution cap

In light of the respondents’ concerns that the warrant dilution cap of 30% may not provide a sufficient commercial incentive for potential investors in an IPO of a SPAC, the Stock Exchange amended the Proposed Rules by raising the cap to 50% and requiring the listing document for the De-SPAC Transaction to include prominent disclosure of the dilutive effect of all warrants to be issued by the SPAC and that the Successor Company that they must separately announce the dilutive effect of the warrants for the benefit of new investors immediately upon its listing.

An additional requirement is also imposed by the Stock Exchange that the minimum exercise price of the SPAC warrants and promoter warrants (“Promotor Warrants”) must be at a price representing at least 15% premium to the issue price of the SPAC shares. However, separate cap on the warrant to share ratio and on Promoter Warrants is no longer required.

Conclusion

The new rules are set out in the new Chapter 18B of the Main Board Listing Rules and came into effect on 1 January 2022 together with the guidance letter on SPACs, which will allow a SPAC seeking to list in Hong Kong to submit a formal listing application pursuant to this new regime.