By LIU Chenguang

SPACs are soon to be allowed in Hong Kong Stock Exchange, following a rise in SPAC listings on US stock exchanges. Last year, US$83.4 billion was raised through SPACs in the US, up from US$13.6 billion in 2019. The amount was US$110 billion in H1 this year, more than the 2020 total.

A SPAC (special purpose acquisition company) is a shell corporation that lists on a stock exchange with the goal of merging with a private business and taking it public. The sponsors of a SPAC raise funds from investors, after which they have about two years to identify a target or return the money. The process is quicker and cheaper than a traditional IPO and is subject to less regulatory oversight.

Bonnie Chan, head of listings at Hong Kong Exchange, said SPACs would be an alternative to traditional IPOs and make the exchange more attractive to issuers and investors. Twelve companies in China and Southeast Asia have been listed through SPACs on US exchanges in the past three years, bringing the total to 25.

Rules

A SPAC in Hong Kong must raise a minimum of HK$1 billion in its initial offering. Subscriptions will be restricted to professional investors, but anyone can trade the shares of the merged company. At least 25 percent of the merged company’s market capitalization must be held by independent third-party investors (or at least 15 percent if the market capitalization is more than HK$1.5 billion).

Each SPAC must have at least one licensed sponsor, who must also own 10 percent or more of the shell company. Sponsors can hold no more than 30 percent of the SPAC (including warrants upon exercise). They have 24 months after the fundraising to find a target and 36 months to complete the merger.

The minimum IPO size is large – HK$1 billion –versus US$50 million on Nasdaq and US$100 million on NYSE. In addition, US exchanges usually do not have restrictions on who the sponsors are, how many shares they can hold, and what percentage of the merged company must be owned by independent third-party investors.

SPACS will help HKSE remain competitive. Although SPACs have often been criticized for loose oversight and speculation, the risk can be managed through regulations and trading mechanisms.

Expectations

“Compared to US SPACs, the proposal is more conservative in terms of sponsor and investor requirements,” said SHEN Meng, Executive Director at Xiangsong Capital. “This will discourage speculation and offer more protection to small-to-medium-sized investors.”

Dennis Huang, CEO of Wilson Capital International, said a key difference is that individual investors in the US can buy into SPAC IPOs but are barred from participating in Hong Kong. “Individuals are usually more enthusiastic since institutional investors have many other options. In general, US exchanges offer a lot more incentives to sponsors and investors.”