On September 17, 2021, the Hong Kong Stock Exchange (“SEHK”) published a consultation paper on the proposed Special Purpose Acquisition Companies (“SPAC”) listing regime in Hong Kong, setting out the initial framework with requirements on (i) limiting the SPAC offerings to “Professional Investors” only at certain minimum offering size, (ii) qualifications of the SPAC Promoters and caps on their “Promote” shares/warrants, and (iii) aligning the de-SPAC criteria to those of a new Hong Kong listing.
Typical SPAC Structure
SPACs are shell companies formed by a group of professional managers with private equity investment or corporate finance experience (the “Promoters”) to raise funds in an IPO for the purpose of acquiring an operating business by way of business combination within a fixed period after the IPO (the “de-SPAC”).
The SPAC IPO offers to investors SPAC units consisting of listed SPAC shares (the “SPAC Shares”) and a SPAC warrant with the right to purchase a fraction of a SPAC Share at an exercise price above the IPO price within certain time from the De-SPAC (the “SPAC Warrants”). SPAC Shares and SPAC Warrants can be traded separately, subject to regulatory arrangements.
The IPO/underwriting expenses and initial working capital of the SPAC will be funded by the Promoters in consideration for (a) initial shares (of no more than 20%) at nominal price, convertible on 1:1 basis into listed SPAC Shares upon the De-SPAC (the “Promoter Shares”), and (b) warrants with the right to purchase a fraction of a SPAC Share (the “Promoter Warrants,” together with the Promoter Shares, known as the “Promote” as incentives to the Promoters). Any additional capital needed for the de-SPAC will often be funded by debt or equity financing committed by third party investors, such as a private investment in public equity (“PIPE”), and/or additional financing by the Promoters. The consummation of the de-SPAC is subject to approval by the SPAC shareholders. Importantly, the shareholders who vote against the de-SPAC have the ability to redeem their SPAC Shares at the IPO price, and the Promoters will need to raise additional financing, typically through a PIPE, to cover any shortfall. If the de-SPAC is approved by the shareholders and closes, the SPAC and the target business will combine into an operating listed company on the SEHK.
Key Proposals by the SEHK for the Hong Kong SPAC Regime:
1. Minimum Fund-raising: Minimum funds raised by SPAC IPO must be at least HK$1 billion.
- Minimum board lot subscription size of HK$1 million for SPAC Shares at HK$10 or above per share. No minimum subscription size for SPAC Warrants.
2. Investor Pool: Before de-SPAC, only Professional Investors (as defined under the Securities and Futures Ordinance of Hong Kong (the “SFO”)) can subscribe for and trade SPAC Units, including secondary trades after SPAC IPO.
- SPAC must have minimum of 75 Professional Investors, of which 30 must be Institutional Professional Investors.
- At least 75% of each of SPAC Shares and SPAC Warrants are held by Institutional Professional Investors.
- Intermediaries in secondary sale of SPAC securities are to satisfy SEHK with sufficient KYC procedures to limit trades with Professional Investors only. Approval process proposed for brokers to provide written undertakings not to market or trade SPAC securities to non-Professional Investors.
After de-SPAC, SPAC Shares and SPAC Warrants are freely transferable by all investor types
3. Requirements on SPAC Promoters and Directors: At least one Promoter holding at least 10% of the Promoter Shares must hold Type 6 and/or 9 licence issued by the Hong Kong Securities and Futures Commission.
- Promoters are to meet certain character, experience, integrity and competence standards to the SEHK’s satisfaction.
- Preference to Promoters with experience (a) in asset management of HK$8 billion in value for at least 3 continuous financial years or (b) as senior executive of a listed company in Hang Seng Index or equivalent.
- Majority of SPAC directors must be officers (i.e. director, manager or secretary) of the Promoter.
- Material change (i.e. change in control or revocation of SFC license) in Promoters must be approved by 75% of disinterested SPAC shareholders.
4. Restrictions on Promoter Shares: Prior to de-SPAC, only Promoters can beneficially hold Promoter Shares and Promoter Warrants that will NOT be listed, though they can be held through a limited partnership or trust.
- Lock-up: 12-months post-de-SPAC lock-up on SPAC Shares converted from Promoter Shares. Promoter Warrants are NOT exercisable during this period.
5. Caps on Promoter Shares/Warrants:
- Promoter Shares are capped at 20% of SPAC’s total number of issued shares at IPO (with further issuance of up to 10% after de-SPAC if earn-out targets as approved by shareholders are met).
- No anti-dilution rights are allowed for Promoter Shares (except consolidation/sub-division).
- Conversion ratio between Promoter Shares and SPAC Shares must be on 1:1 basis only.
- Promoter Warrants, if exercised, are capped at no more than 10% of SPAC’s total number of issued shares at time of warrant issuance.
- Promoter Warrants shall not be issued at less than fair value and cannot attach more favorable terms than other SPAC Warrants (i.e. exceptions from forced exercise of warrants).
6. Restrictions on SPAC Warrants and Promoter Warrants:
- Approvals: Issuances, grants, change in terms are subject to approval by SEHK and (after IPO) SPAC shareholders.
- Time constraints: Only exercisable after de-SPAC, and must expire not less than 1 year and not more than 5 years from de-SPAC.
- Warrant ratio: Capped at no more than a third of a SPAC Share upon exercise.
- Caps: Warrants, if exercised, are capped at no more than 30% of SPAC’s total number of issued shares at time of warrant issuance.
- Proposal that separate trading of SPAC Shares and SPAC Warrants before De-SPAC allowed only with (a) manual trades without auto-matching orders; or (b) SEHK volatility control mechanism with 5-minute cooling-off trading period upon price deviation of 30% or more.
7. De-SPAC to meet Criteria of a New Listing:
- The post-de-SPAC listed company (the “Successor Listco”) is to meet all listing requirements for an ordinary Hong Kong IPO under the SEHK Listing Rules (i.e. (a) comprehensive due diligence by IPO Sponsor; (b) minimum market cap of at least HK$500 million upon listing; (c) three-financial years of management continuity and one-financial year of ownership continuity; and (d) minimum profits, revenue and/or cash flow tests).
- De-SPAC for biotech companies and mineral companies or resulting in WVR structure would be possible (subject to compliance with the relevant requirements under Chapters 18A, 18 and 8A of the SEHK Listing Rules respectively). Investment companies (under Chapter 21 of the SEHK Listing Rules) would unlikely be eligible for de-SPAC.
- De-SPAC target must have FMV of at least 80% of SPAC IPO proceeds.
- Connected Transaction: De-SPAC with SPAC’s Promoters, directors and trustees/custodians (as “connected persons” of listed SPAC) is permissible subject to (a) compliance with “connected transaction” requirements under the SEHK Listing Rules, including approval by independent SPAC shareholders based on independent valuation, (b) minimal conflicts of interest, (c) SPAC and these connected persons are not 30% voting shareholders of de-SPAC target, and (d) no cash consideration to these connected persons and 12-months lock-up for any consideration shares.
8. Mandatory New 3rd Party PIPE for de-SPAC: To validate the minimum market cap of the Successor Listco, de-SPAC must be funded by PIPE by an independent party outside the SPAC which:
- Constitutes at latest 25% of expected market cap of Successor Listco (or 15%, if expected market cap is HK$1.5 billion) at de-SPAC completion.
- Must be by at least one asset management firm (with asset under management of at least HK$1 billion) and will own at least 5% of issued shares upon de-SPAC completion.
9. De-SPAC Approval and Timing:
- De-SPAC must be approved by SPAC disinterested shareholders at general meeting. Written shareholders’ approval would not be acceptable.
- De-SPAC must be announced within 24 months of SPAC IPO and completed within 36 months of SPAC IPO, subject to extension of up to 6 months with approvals by ordinary resolutions of disinterested shareholders (i.e. other than Promoters, outgoing controlling shareholders and their close associates) and SEHK.
- Failure to meeting de-SPAC deadlines would lead to (a) trading suspension, (b) return of 100% of funds raised to SPAC shareholders within one month of suspension, and then (c) liquidation and de-listing of SPAC.
10. Redemption by Shareholders: Only shareholders voting against the de-SPAC could redeem SPAC Shares fully or partially, but they can retain their SPAC Warrants. SPAC cannot impose limits on amount of shares redeemable by a shareholder.
- Redemption Amounts: IPO offering price plus accrued interest.
- Redemption Triggers: (a) De-SPAC; (b) material change in Promoter; and (c) extension of de-SPAC announcement or completion deadline.
- Redemption Timing: Subject to completion of De-SPAC, but within one month of general meeting to approve de-SPAC.
11. Shareholders Spread of Successor Listco: (a) Minimum of 100 shareholders; (b) 25% public float for each of SPAC Shares and SPAC Warrants; and (c) three largest public shareholders cannot hold more than 50% of all public shares upon SPAC IPO.
The above is only a proposed framework of the Hong Kong SPAC listing regime under consultation, and the new rules for such regime would be expected after closing of the consultation on October 31, 2021. On the backdrop of offering de-SPAC targets the benefits of shorter lead-time and greater price certainty than a traditional Hong Kong IPO, the SEHK’s SPAC listing regime aims to attract reputable Promoters to seek high quality de-SPAC targets at strong valuations for listings in Hong Kong. The comprehensive and enhanced parameters of the Hong Kong SPAC regime targets to maintain proper safeguards to investors and would provide an alternative to businesses with substantive quality to list in Hong Kong.
Goodwin’s Hong Kong practice has a deep understanding of the legal, business, financial and marketing issues that affect the success of capital markets transactions and business combinations. Please contact our team here for all aspects of the SPAC lifecycle in the upcoming Hong Kong regime, including formation and structuring Promoter entities; representing SPAC and Promoters; representing operating companies and investors in the de-SPAC; and structuring debt and equity financing transactions for the de-SPAC.
 “Professional Investors” includes any Institutional Professional Investors (see Note 2), and any individual and corporate entity falling under the Securities and Futures (Professional Investor) Rules of Hong Kong, namely: (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.
 “Institutional Professional Investors” are those under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the SFO, including recognized exchange companies, certain SFC licensed corporations, authorized financial institutions, insurers, collective investment schemes, governments and central banks.