SPACs – Possible New Gateway to Fundraising in Hong Kong?

Hong Kong is mulling over a listing regime for special purpose acquisition companies (SPACs), which is looking to be ready for public consultation by June this year and targets to allow SPACs listing by the end of 2021, according to industry players familiar with the matter. This came after the Hong Kong Financial Secretary’s request in March this year for the city’s Stock Exchange (HKEx) and securities watchdog, the Securities and Futures Commission (SFC), to seriously consider whether they should allow the listing of SPACs. The Asia financial hub is in a race with Singapore, which released a consultation paper on a SPACs listing regulatory framework on 31 March 2021.

SPACs are far from new - they have in recent years boomed in popularity in the United States, which hosts around 97% of the SPAC funds raised in 2021. Financial hubs in Asia are now jumping on the bandwagon after several tycoons in Hong Kong and Asia expressed interests in raising funds through SPACs in the United States, rather than in Asia.

What are SPACs?

SPACs, or blank-cheque companies, are shell companies established solely for the purpose of going through an initial public offering (IPO) to raise capital. Different from a company going through a traditional IPO, SPACs do not have assets or existing commercial operations at the time of listing. In a typical SPAC, 20% of the SPAC’s equity will be owned by the sponsors, while the remaining 80% will be offered to investors through an IPO. The funds raised from a SPACs listing will be used for the sole purpose of acquiring a target business, which is usually a private company.

The acquisition of the target, also known as “de-SPACing”, will need to complete within a specified time frame, which is usually two years after the SPAC’s IPO. If the SPAC is unable to acquire the target business in time, the SPAC will either search for another target or return the raised capital to its investors. After the acquisition, investors will either redeem their shares and receive any interest accrued, or swap their shares in the SPAC for the shares in the acquired business.

Commonly known as “backdoor listing”, SPACs have piqued the interests of sponsors who would like to raise capital quickly – a SPAC listing can happen in a matter of weeks, while a traditional IPO could take around 12 months to complete. This new avenue of listing is said to likely avoid the uncertainties arising from volatility of the stock market, particularly after the COVID-19 outbreak.

Regulator’s Cautious Approach

Whether Hong Kong’s SPACs framework will safeguard investors’ interests, or attract SPACs to list in Hong Kong, will depend on how the final regime is structured.

There are concerns that allowing SPACs to list in Hong Kong could hinder the HKEx’s efforts to combat stock manipulation. For example, the HKEx has in recent years tightened its restrictions on backdoor listings and related shell activities in circumvention of the traditional listing requirements. These activities were seen to be a hotbed for market manipulation.

It remains to be seen what approach the regulators will take to permit blank-cheque companies to list, while robustly regulating backdoor listing concerns. The former CEO of HKEx, Mr. Charles Li, has expressed that while Hong Kong may allow SPACs and de-SPACs, SPACs will still have to go through a listing process. Industry players have also suggested that, in order to protect the investing public, regulators could screen the target portfolio companies and require sufficient information of the sponsors and investment objectives to be provided to the investors.

SPACs are therefore expected to be subject to tighter restrictions in Hong Kong than the United States. However, when crafting the regulatory framework, the regulators will need to be minded that the stricter regulations may hamper Hong Kong’s ability to attract SPACs to list in the city.

SPACs and the Private Equity Space

Despite these challenges, SPACs are anticipated to be a popular avenue of fundraising for private equity funds in Hong Kong. We have seen a surge in private equity or venture capital funds setting up SPACs as sponsors to gain access to public markets. The access to public markets allows for more open-ended private equity investments. It also means that SPACs private equity sponsors can pursue larger acquisition targets. In addition, SPACs can serve as co-investment vehicles alongside the main private equity fund. Sponsors can therefore invest in parallel with more equity and less debt. From the perspectives of investors, SPACs are expected to be an attractive investment vehicle as its shares will provide better liquidity than an investment in a private equity fund or a private portfolio company.

DLA Piper has been helping various funds and investment management clients to invest in and sponsor SPACs, as well as the underlying acquisitions of private company assets for SPACs.

If you are interested in setting up a SPAC, the upcoming SPAC listing regime or any alternative investment structures, please contact Luke Gannon (Head of Funds and Investment Management, Asia) or another member of our corporate team.

About our funds and investment management group

Our group in Asia represents a wide range of clients in the financial services sector including fund sponsors, fund managers, investment advisers, securities brokers, investment banks, investors, trustees, administrators, custodians and other players. We help clients design and establish a wide variety of funds including alternative assets funds such as hedge funds, virtual assets and digital assets funds, private equity, venture capital, real estate and infrastructure funds. We also advise clients on SFO regulation and SFC related matters such as advising on licencing requirements, registrations, licence applications and alterations, and general SFC regulatory and compliance requirements.