The recent revisions to the Hong Kong Main Board Listing Rules introducing the SPAC regime is an incredibly positive step forward in addressing the competitive disadvantage Hong Kong faced in attracting SPAC sponsors to the market, particularly from the dominant US exchanges.   

Although some commentators have noted that the quality and suitability requirements set out in the new regime are too high and will detract from the commercial attractiveness of the regime, SPAC promotors in the PRC and Hong Kong have largely welcomed the development and see it as increasing the attractiveness and accessibility of Hong Kong as a listing venue.

The new Hong Kong SPAC listing regime seeks a balance, introducing relatively stringent requirements for the quality of both listing candidates and also de-SPAC targets, addressing the commercial needs of SPAC sponsors whilst also raising the bar in terms of investor protections. Key examples of the focus on investor protection include:

  • only professional investors are allowed to participate in the SPAC at IPO stage;
  • once the SPAC IPO completes and moves to the de-SPAC transaction, retail investors may participate in trading in the securities of the de-SPAC target;
  • promoter shares are capped at a maximum of 30% of the total number of the shares in issue at the SPAC IPO;
  • SPAC shareholders must be given the option to redeem their shares prior to the de-SPAC transaction;
  • the de-SPAC target is required to undergo the same vetting procedures as with other traditional IPOs;
  • funding by third party independent PIPE investors in the de-SPAC transaction is mandatory, with at least 50% of the independent PIPE investment to come from at least 3 Sophisticated Investors (as defined under the Listing Rules).

All of these measures are aimed at providing more protection and confidence to investors. The SPAC promoters must meet a set of suitability and eligibility requirements according to the SPAC rules (e.g. the requirement to have at least one SPAC promoter to be a Type 6 (advising on corporate finance) and/or Type 9 (asset management) licence issued by the SFC), which are intended to result in better quality de-SPAC targets, and by extension, better market performance. According to a study conducted by Spac Research as reported in an article published by the Financial Times on 21 January 2022, until 19 January 2022, share prices of the 199 SPAC mergers completed in 2021 in the US have dropped on average around 40%.  With the high volatility on the performance in the US SPACs space, the enhanced scrutiny of the Hong Kong SPACs listing regime offers greater confidence to sponsors to identify better quality de-SPAC targets. We believe the above features can assist to differentiate the Hong Kong SPAC regime as being an enhanced version of SPAC listing regimes globally. It offers (i) SPAC promoters (which if the US experience is anything to go by, will include major regional private equity sponsors) a streamlined route to raising local capital without the long timeline of the traditional road show process, and (ii) de-SPAC targets an alternative to the traditional IPO route, in each case in a more regulated environment, aligning with the interests of market participants.

Cayman Islands companies continue to be favoured by sponsors and investors when structuring a SPAC transaction, particularly where the target company is based outside of the US. The Cayman Islands offers a range of benefits, such as a sophisticated judicial system which is substantially based on English common law, political stability, tax efficiency, flexibility of capital maintenance rules, no restrictions on exchange control, a straightforward statutory merger regime and a long history of recognition by the world's leading financial centers and securities exchanges. M&A deals involving Cayman Islands companies are mostly structured through Cayman Islands statutory mergers (for instance, most SPACs with non-US targets are using Cayman Islands incorporated companies as the SPAC to cater for the subsequent de-SPAC transaction). As of June 2021, there were 289 Cayman Islands companies listed on NASDAQ and 185 Cayman Islands companies listed on the New York Stock Exchange. By end of 2020, there were 1,186 Cayman Islands companies listed on the Hong Kong Stock Exchange, which accounted for 60.36% of the aggregate number of listed companies on the Hong Kong Stock Exchange. With the implementation of the Hong Kong SPACs regime, we are optimistic that the demand for Cayman vehicles will continue to grow.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.