Special Purpose Acquisition Companies – or SPACs – are shell companies created to raise money through public listing with the aim of later acquiring an existing company. They have attracted considerable interest of late, and Hong Kong Exchanges and Clearing (HKEX) has proposed introducing a listing regime for SPACs. 

However, there are also growing concerns over the potential shortcomings of SPACs in jurisdictions where they have had a longer history, such as the United States. 

The Chamber has responded to HKEX’s recent Consultation Paper on the topic: the key points from our submission are below.

General Comments

Any consultation on a new policy initiative such as this should be accompanied by a regulatory impact assessment, demonstrating that the benefits of the proposal exceed its costs. In this respect, we have two concerns:

1   The Consultation Paper lists a number of “potential benefits” of introducing a SPAC listing regime in Hong Kong, but also a number of “major issues.” It is not clear that the benefits of introducing a SPAC listing regime exceed its costs. Indeed, the Consultation Paper seems to indicate that the opposite may be the case.

2   Nevertheless, the Consultation Paper proposes that a SPAC listing regime be introduced in Hong Kong. It does not invite public views, in particular on whether the benefits of introducing such a regime exceed the costs.

Potential benefits

The Consultation Paper distinguishes between three categories of potential beneficiaries of a SPAC listing regime: SPAC Investors, De-SPAC Targets, and Hong Kong itself. 

However, as far as SPAC Investors are concerned, the suggested benefits identified are in fact safeguards to protect them if a SPAC listing regime were introduced, which is a different matter.

As regards potential benefits to De-SPAC Targets – the companies that will be acquired – the Consultation Paper states that one of the “purported” benefits of listing via a SPAC is that less time is needed to execute a De-SPAC Transaction than to execute a traditional IPO transaction. Reduced execution time is stated as being important to ensure that an issuer lists at a time that is optimum to ensure its highest valuation. 

However, the Consultation Paper questions whether this alleged benefit is actually a real one. It also questions the alleged benefit that the De-SPAC Target will be able to list at a more attractive price than under a traditional IPO.

Major issues

The major issues of introducing a SPAC listing regime in Hong Kong appear to be more definite than the potential benefits, according to the Consultation Paper – at least in the absence of appropriate safeguards. 

These include concerns about shell companies, volatility of share prices, the risk of market manipulation and insider dealing, quality of management concerns, quality of market concerns, and shareholder protection concerns. This last category is perhaps the most important, given HKEX’s statutory duty to protect the interests of the investing public. 

Proposed safeguards

The Consultation Paper proposes a number of safeguards that aim to find a suitable balance between providing the potential benefits, while mitigating the major risks. Perhaps the most significant one is that the subscription and trading of SPAC securities prior to a De-SPAC Transaction should be limited to Professional Investors (as defined in the Securities and Futures Ordinance) only.

However, we have two concerns about this proposed safeguard:

1.  By severely limiting the number of Potential Investors, it would also limit further the potential benefits of introducing a SPAC listing regime. The population of Professional Investors in Hong Kong to whom SPACs could be marketed is relatively small.

2.  If one potential benefit of introducing such a regime is to enable HKEX to compete more effectively against its counterparts in the U.S., United Kingdom and Singapore, such a limitation would undermine this potential benefit.

We therefore recommend that, if a SPAC listing regime is introduced, rather than imposing a limitation to Professional Investors only, attention should be focused on ensuring that the other proposed safeguards are sufficient.

Conclusion

SPACS are currently a controversial topic worldwide, particularly in the U.S. The Consultation Paper itself notes that, after earlier popularity, they have recently fallen out of favour there because of increased regulatory scrutiny based on shareholder protection concerns. 

At the same time, a SPAC listing regime has recently been introduced in Singapore, and the United Kingdom’s regime has recently been refined. 

We recommend observing how the current controversy surrounding SPACs resolves itself, and assessing the impact of recent regulatory changes in the U.K. and Singapore, before deciding whether to introduce a SPAC listing regime in Hong Kong. 

This is especially the case since the possible benefits of such a regime do not appear compellingly to outweigh the costs, and there is no pressing demand for the introduction of such a regime.

However, should the decision be made to accommodate the use of SPACs as a listing vehicle in Hong Kong, we suggest that existing listing rules be applied to the greatest extent possible.

This is an abridged version of the Chamber’s response to the HKEX Consultation Paper on Special Purpose Acquisition Companies. You can read our full response on the HKGCC website.

https://www.chamber.org.hk/en/advocacy/policy_comments.aspx?ID=532