Hong Kong introduces new listing regime for SPACs

An important chapter for Hong Kong's capital markets is ready to be unveiled as the rules for establishing a new SPACs listing regime are set to take effect on 1 January 2022. In this update, we will look at the key features of Hong Kong's new SPACs regime, including some key points to note for those interested in exploring to float in Hong Kong via this new alternative listing route.

Introduction

On 17 September 2021, The Stock Exchange of Hong Kong Limited (Stock Exchange) released its consultation paper (consultation paper) on proposals to create a listing regime for SPACs (special purpose acquisition companies) in Hong Kong.

In the months that followed, the market was engaged in active consultation on the proposed regime, and many stakeholder groups contributed their thoughts and suggestions to the regulators.

On 17 December 2021, the Stock Exchange issued the conclusions to the consultation paper (consultation conclusions), which includes the final listing rule amendments together with a guidance letter (guidance letter) for Hong Kong's new SPACs listing regime effective 1 January 2022.

As originally proposed, to address circumstances particular to Hong Kong, a unique feature of the new SPACs regime is that subscriptions and trading of SPAC securities prior to a "De-SPAC transaction" will be limited to qualifying "professional investors" only.

Specific safeguards and thresholds have also been adopted to ensure that SPACs with experienced and reputable promoters that seek good quality "De-SPAC targets" are attracted to list in Hong Kong.

While the Stock Exchange has decided to proceed broadly as proposed, there are various modifications and fine-tuning of the rules and guidance after taking into consideration market feedback.

In this update, we will examine the key features of the new SPACs regime, noting in particular key areas where the final rules have been modified compared with the proposals in the consultation paper.

What are SPACs?

In brief, SPACs (or blank cheque companies) are shell companies with no operating business and are formed solely to raise capital through an initial offering (IPO) and listing on an exchange with the purpose of using the proceeds to identify and acquire a target business (De-SPAC target) within a specified timeframe.

The SPAC will then merge with the De-SPAC target, the completion of which will lead to the resulting "Successor Company" becoming a listed company on the stock exchange (De-SPAC transaction).

In addition to shares (SPAC shares), SPAC offerings may include an issue of warrants (SPAC warrants) which give holders the right to purchase shares in the SPAC at a set exercise price and a set time. SPAC warrants are often viewed as a "sweetener" to compensate the SPAC's initial investors for a lack of return on their investment until a De-SPAC transaction takes place.

SPACs are typically formed by professional managers, usually with private equity, corporate finance and relevant industry experience (SPAC Promoters). As incentives, a special class of shares are often issued to SPAC Promoters at a nominal value (promoter shares) and a special class of warrants may also be issued exclusively to the SPAC Promoters (promoter warrants).

The new SPACs regime provides companies with the option to float in Hong Kong via a traditional IPO or via a De-SPAC transaction. While each route has its own benefits, compared with traditional IPOs, a De-SPAC transaction can be a quicker and simpler route to access funding and may provide more flexibility in deal structuring and potentially a higher valuation for the De-SPAC target.

What is Hong Kong's new SPACs regime?

The following diagram illustrates how a SPAC works under the new regime:

A new chapter 18B will be added to the listing rules to regulate the listing of SPACs in Hong Kong.

The listed securities of a SPAC will be assigned a special stock short name marker - the stock short names of SPAC shares will end with the marker "Z" and the stock short names of SPAC warrants will end with the marker "Z Y Y M M" or "Z Y Y" (with YY representing the expiring year and MM representing the expiry month of the SPAC warrants).

Key points to note from the SPAC's formation and initial listing, closing of a De-SPAC transaction through to the listing of the Successor Company are highlighted in the table linked below.

View table

Implementation and next step

The rules and the guidance letter for SPACs will take effect on 1 January 2022.

The new SPACs listing regime opens an important new chapter for Hong Kong's capital markets and we look forward to its successful implementation.

If you have any questions regarding the matters covered in this publication, please reach out to any of the lawyers listed below or your usual Davis Polk contact.

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