Introduction

On 17 September 2021, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper (the “Consultation Paper”) introducing its proposal to create a listing regime for special purpose acquisition companies (the “SPACs”) in Hong Kong and the proposed accompanying Listing Rules. The Exchange is seeking market feedback on its SPAC proposals by 31 October 2021.

Reasons for and Potential Benefits of a SPAC Listing Regime

The introduction of a SPAC listing regime in Hong Kong will enhance Hong Kong’s competitiveness as an international finance centre and a fundraising hub.  De-SPAC targets consider listing by way of SPACs to be a more attractive option than a traditional IPO. It is because listing via SPACs can potentially result in a shorter listing time, greater price certainty and greater flexibility in structuring a De-SPAC transaction.

That said, the cornerstone of Hong Kong in maintaining its status as an international finance centre is its reputation for high quality listings and stable secondary trading.  It is therefore important that the safeguards for the SPAC listing regime would not only maintain but enhance the Exchange’s reputation for attracting quality investors.

Key Proposals to Establish a SPAC Listing Regime

The summary of the key proposals to establish a SPAC listing regime set out in the Consultation Paper is as follows:

Pre De-SPAC Transaction
• Investor Suitability:

1. Only professional investors (as defined under the Securities and Futures (Professional Investor) Rules (Chapter 571D of the Laws of Hong Kong), i.e. (i) an individual having a portfolio of not less than HK$8 million; (ii) a trust corporation with total assets of not less than HK$40 million; and (iii) corporation or partnership which have a portfolio of not less than HK$8 million or total assets of not less than HK$40 million) can subscribe for and trade the securities of SPACs (i.e. prior to the De-SPAC transaction). This restriction, however, would not apply to the trading of the shares of the listed issuer following the completion of a De-SPAC transaction (the “Successor Company”);

2. At its initial offering, a SPAC must distribute each of its SPAC shares and SPAC warrants to at least 75 professional investors and at least 30 of which shall be institutional professional investors; and

3. At its initial offering, at least 75% of each of its SPAC shares and SPAC warrants must be distributed to institutional professional investors by a SPAC;

• Trading Arrangements: there should be separate trading of SPAC shares and SPAC warrants from the initial offering date and with additional mechanisms to mitigate the risks of volatility in the trading of SPAC warrants;

• Dilution Cap: 

1. Professional managers who establish and manage the SPAC (the “Promoters”) are entitled to up to a maximum of 20% of the total number of all shares in issue as at the initial offering date with further issuances of up to 10% subject to the Successor Company meeting set performance targets (i.e. earn-outs); and

2. Prohibition from issuing warrants in aggregate that, if exercised, would result in more than 30% of the number of shares in issue at the time such warrants are issued is also proposed;

• SPAC Promoters: SPAC Promoters (typically formed by professional managers who have private equity, corporate finance and/or relevant industry experience) must meet suitability and eligibility requirements including at least one of the SPAC Promoters must be a firm holding: (a) a Type 6 (advising on corporate finance) and/or Type 9 (asset management) licence issued by Securities and Futures Commission; and (b) at least 10% of the Promoter Shares (i.e. shares of a SPAC typically issued at a nominal price to SPAC Promoters at the initial offering, which will convert into SPAC Shares at the time of the De-SPAC transaction);

• Fund Raising Size: the fund-raising size expected by a SPAC from its initial offering must be at least HK$1 billion;

• Funds Held in Trust:  100% of the gross proceeds raised from the SPAC’s initial offering are held in a ring-fenced trust account in Hong Kong until a De-SPAC transaction takes place or the SPAC is liquidated; and

• Issue Price: SPACs are required to issue their SPAC shares at an issue price of HK$10 or above.

De-SPAC Transaction

• Application of New Listing Requirements in full: a Successor Company must fulfil all the new listing requirements (including due diligence by Sponsor, management continuity and ownership continuity requirements, minimum market capitalisation requirements and financial eligibility tests);

• Independent Third Party Investment: this would be mandatory outside independent PIPE investment and must:

1. constitute at least 25% of the Successor Company’s expected market capitalisation (or at least 15% if the Successor Company’s expected market capitalisation is over HK$1.5 billion at listing); and

2. at least one asset management firm or fund (with at least HK$1 billion assets under management/fund size) owns at least 5% of the issued shares of the Successor Company as at the date of its listing;

• Shareholder Vote on De-SPAC Transactions: a De-SPAC transaction must be approved by SPAC shareholders at a general meeting (and would exclude the SPAC Promoter and other shareholders with a material interest). If the De-SPAC Transaction results in a change of control, any outgoing controlling shareholders of the SPAC and their close associates must not vote in favour of the De-SPAC Transaction. SPAC shares shall only be redeemed if the SPAC shareholders voted against a De-SPAC transaction;

• Forward Looking Information: The existing requirements for an IPO (including the requirement for reports from the reporting accountant and IPO sponsor on such statements will apply to any forward looking statements in the listing document for a De-SPAC transaction (including the requirement for reports from the reporting accountant and IPO sponsor on such statements);

• Open Market in Successor Company’s Shares: A Successor Company must have at least 100 shareholders to ensure adequate spread of holders of its shares; and

• Warrants: The Promoter warrants and SPAC warrants are only exercisable after the completion of a De-SPAC transaction.

Liquidation and De-listing

• The SPAC will be suspended from trading and liquidated within one month of such suspension if it: (a) fails to announce a De-SPAC transaction within 24 months or complete a De-SPAC transaction within 36 months; or (b) fails to obtain the requisite shareholders’ approval for a material change in SPAC Promoters within one month of the said material change.  The SPAC must return 100% of the funds raised from the initial offering to its shareholders at the price its shares were issued plus accrued interest. The SPAC will then be de-listed.

Analysis and Takeaways

In recent years, listing via SPACs has become one of the trendiest international fundraising methods, and it is primarily prevalent in the United States.  Understandably, Hong Kong has taken a cautious approach in considering whether to jump on the SPAC bandwagon.  This is because a facet of SPACs can be seen to be cash shells without operations.  The use of shell companies as listing vehicles and the so-called back-door listings have always been a regulatory concern, as it has the potential for market manipulation, insider dealing and volatility in the market. To avoid the SPAC listing regime to be used as a means to circumvent the quantitative and qualitative criteria for listing, the Exchange has, among others, proposes to apply new listing requirements to De-SPAC transactions. Thus, the Successor Company will need to meet all new listing requirements.

In early September, Singapore has also picked up the trend and became the first Exchange in Asia to allow SPAC listings. It is therefore a welcoming move for the Exchange to consider and propose the establishment of a SPAC listing regime in order to maintain Hong Kong’s competitiveness as a leading financial centre, especially for companies in Greater China and South East Asia that may wish to get listed via De-SPAC transactions.

Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This newsletter is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

Background

On 2 September 2021, the Singapore Exchange (the “SGX”) has released the “Responses to Comments on Consultation Paper (the “Consultation Paper”) on SPACs” (the “Responses”) in relation to its proposed listing framework for SPACs. It allows SPACs to be listed on the Mainboard (“Mainboard”) of Singapore Exchange Securities Trading Limited (“SGX-ST”) with effect from 3 September 2021, making it the very first Exchange to allow SPAC listings in Asia.

This article follows up with our news update in May 2021 on the Consultation Paper. In particular, we discuss about the main commercial features introduced by the Singapore Exchange in their SPACs framework, as summarised in the Responses.

Key features of SGX SPACs

Relaxation of Original Proposals

In the Responses, SGX agreed to relax some of the original proposals in the Consultation Paper in relation to the SPAC’s listing framework.  The below table sets out a comparison between the two:

SPAC Sponsors have “More Skin in the Game”

Moratorium

Unlike the traditional IPO, there is a moratorium (akin to a lock-up undertaking) on the 100% of shares of the sponsor from IPO to the completion of the business combination, and a further 6-month moratorium on 50% of their shareholdings after the completion of business combination. The aim is to align the interests of the key persons and other shareholders that involved in the IPO and ensure the commitment of the key persons towards the long-term success after the business combination.

Minimum Equity Participation

In response to the market feedback, SGX also imposed a minimum equity participation on the SPAC’s sponsor and management team as to ensure they have “skin-in-the-game”. They are required to subscribe the shares and/or warrants, as the case may be, in accordance with the following requirements:

Limit on Sponsor’s Promote

When the sponsors form a new SPAC, it shall have an opportunity to invest in a SPAC at nominal or without consideration for sponsoring the SPAC (i.e. sponsor’s promote).  SGX has limited the sponsoring to 20% of the issued share capital of the SPAC immediately after the IPO.

Measures pending and in relation to Business Combination

Gross Proceeds in Escrow Account

In addition, SGX also required the SPAC to allocate at least 90% of the gross proceeds raised from its IPO in an escrow account immediately upon the IPO. Except for business combination, liquidation or other specified circumstances, the escrow account shall not be drawn down, and the account shall be operated by an independent escrow agent.

Approvals of Business Combination by Independent Directors and Shareholders

After listing, in addition to the permitted timeframe as discussed above to complete the business combination, SGX further required the business combination to be approved by a simple majority of independent directors and an ordinary resolution passed by the shareholders at a general meeting.

Liquidation Distribution Right

The SPAC will be liquidated if it: (a) fails to complete a business combination within the permitted time frame as discussed above; or (b) fails to obtain specific shareholders’ approval for an event of material change regarding the profile of the founding shareholders and/or the management team before the completion of the business combination.  The pre-IPO investors are entitled to participate in the liquidation distribution while the sponsor and the management team must waive their liquidation distribution rights under the SGX’s SPACs framework.

Analysis and Takeaways

The SPAC listings on SGX is the first Exchange that allows “blank check” companies to list in Asia. We note that the usual features for SPAC listings are present in SGX SPACs, such as minimum market capitalisation, the focus on the management’s profile, 24-month de-SPAC time limit, 90% use of proceeds on business combination, 90% IPO proceeds escrow and shareholders’ approval of the business combination.  In overall, the SGX’s SPAC listing requirements are relatively less stringent.

The introduction of SPACs by SGX makes Singapore stay one step ahead of Hong Kong in implementing its SPAC regime.  In this regard, the Hong Kong Stock Exchange has also just released its SPAC conclusion paper on 17 September 2021.  Such development can be seen as an increasing confluence of promoters and investors in facilitating IPOs and listings.

Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This newsletter is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

We are pleased to announce that our firm has been recognised as an Outstanding firm and is ranked across 13 practice areas/ sectors in Asialaw Profiles 2022. In addition, our Partner and Head of Litigation and Dispute Resolution department, Ms. Heidi Chui, has been recognised by Asialaw Leading Lawyers 2022 as Distinguished Practitioner in Dispute Resolution.

About Stevenson, Wong & Co.

Founded in 1978, Stevenson, Wong & Co. is a forward-looking, full-service law firm with over 170 experienced lawyers and staff. As the associated firm with one of the nation’s largest full-service law firms, AllBright Law Offices, and one of the founding members of INTERLAW, Stevenson, Wong & Co. connects China to the world and supports clients facing a variety of business and legal issues with effective solutions.

About Ms. Heidi Chui

Ms. Chui is the firm’s head of Litigation and Dispute Resolution Department and Banking and Finance Department. She has served as the internal legal advisor of several Chinese banks.

Ms. Chui specializes in commercial litigation, arbitration, insolvency, restructuring, banking and finance, employment law and regulatory enforcement. She has extensive international and cross-border experiences in advising liquidators, receivers, official receivers, creditors and other professionals in charge of insolvency and bankruptcy matters in relation to debt restructuring and cross-border asset tracing. She also acts for banks, borrowers, insurance companies, property management companies, funds, listed companies and financial institutions.

Please contact Mr. Willy Cheng or Ms. Heidi Chui for any enquiries or further information.

Mr. Terence Lau, Senior Associate of our corporate finance department, delivered a CPD webinar on “An Overview of a Listing Project” on 8 September 2021. The webinar covered a broad range of topics such as listing criteria, application procedure, reorganisation, prospectus drafting, share offer and post-listing compliance, and attracted a substantial number of attendees.

At the beginning of the webinar, Terence offered an in-depth analysis of the IPO procedure in Hong Kong and revealed the key issues involved in satisfying the increasingly scrutinised listing criteria of the Hong Kong Stock Exchange. In particular, he highlighted the recent amendments to the financial requirements of a listing project and provided the attendees with recent examples extracted from relevant listing decisions and guidance letters which could affect suitability for listing.

Terence then explained the roles of various professional parties, the purpose of different documentations involved in each milestone date, and a sample listing project timeline. By way of elaboration, Terence shared some of his professional experiences in prospectus drafting and the challenges faced by sponsors and legal practitioners in articulating the essential disclosures of a prospectus.

Due to the Covid-19 outbreak, the CPD was delivered via a webinar. Nevertheless, positive feedbacks were received from the attendees and the engaging webinar was concluded with questions from the floor.

For any enquiries or further information, please contact our Mr. Terence Lau.

We are delighted to announce that our Partner and Head of Corporate Finance, Mr. Hank Lo, has been recognised by IFLR1000’s Asia Pacific 2021-22 edition as Highly Regarded Leading Lawyer in Capital Markets: Equity.

IFLR1000 evaluates 5,000+ law firms and lawyers based on transactional evidence and client feedbacks. Lawyers are recognized for advising on some of the most complex or innovative transactions in their markets and receiving excellent feedback for their work.

About Mr. Hank Lo

Hank heads the Corporate Finance Practice in the firm. He specializes in capital markets, corporate finance, mergers and acquisitions and representative matters. Hank has significant experience advising issuers, sponsors and underwriters on initial public offerings on both the main and GEM boards of The Stock Exchange of Hong Kong Limited; advising publicly listed companies on a broad range of corporate finance transactions; advising private equity funds, venture capital funds and Hong Kong listed companies on their investments in and exits from companies with an emphasis on China; and providing advice to companies in Greater China on representative matters including property transactions, foreign investment and initial public offerings.

About IFLR1000

The IFLR1000 is an international legal market’s guide focusing on financial and corporate law firms. Since 1990, IFLR1000 has published over 750 practice area rankings across 235 jurisdictions globally.

For any enquiries, please contact our Partner Mr. Hank Lo or click here to see the ranking.

On 8 September 2021, our Partner Mr. Gordon Tsang, Senior Manager of Commercial and Corporate Finance Department, Dr. Rain Huang, and Paralegal Mr. Arthur Hung were invited to share the rules and regulations of Hong Kong and US IPOs to the directors and senior management of Central China International Capital Limited (Central China Intl).

From the left: Central China Intl’s Director, Mr. Clifford Chan; Paralegal Mr. Arthur Hung, Senior Manager Dr. Rain Huang; Partner Mr. Gordon Tsang; Central China Intl’s President, Mr. Billy Cheung; Associate Director, Ms. Jessica Chan

Gordon gave a comprehensive introduction to Hong Kong IPO’s listing rules and practices by sharing the latest updates of listing requirements, the reorganisation of Red-Chips listing, H-shares listing, trust arrangements, and VIE structures. He also compared the pros and cons of listings in Hong Kong and the United States.

Please contact Mr. Gordon Tsang for any enquiries or further information.