Reporters: LAM Cheuk Leung, LI Chak Ho Keith, CHOONG Hon Lam
A Special Purpose Acquisition Company (SPAC) is a shell company with cash but without any commercial operations. The purpose of such a company is to raise capital through an initial public offering (IPO) and use it to acquire or merge with an existing company. SPACs, therefore, are also called “blank check companies.” Instead of executing its own IPO, the operating company can carry out a “backdoor listing” and becomes a listed company when it is acquired by or merged with a SPAC.
As an emerging listing mechanism in Asia, the process of becoming a listed company through SPAC is very different from that of a traditional IPO. A SPAC is formed by “a sponsor” with some nominal capital. It can then submit a listing application to raise funds in the open market and 85% to 100% of the proceeds will be held in a trust account. It typically has up to two years to identify a target company and submit to SPAC shareholders to vote on the merger. Once the merger is approved by the shareholders and cleared by the regulator, the target company becomes a public entity. If the SPAC is unable to complete a merger within the agreed timeframe, it will be liquidated and the IPO proceeds will be returned to the shareholders.
Even though SPAC is not a mainstream channel for public listing, the financial market in Hong Kong is gradually attaching more importance to it since Singapore started to adopt it in its market. Aquila Acquisition Corporation (7836), the first company successfully listed as a SPAC in Hong Kong on 18 March 2022, was co-sponsored by CMB International and AAC Management Holding. With an issue price of HK$10 per share, it has raised about HK$1 billion.
A double-digit number of SPAC companies have applied for listing so far, including A SPAC (HK) Acquisition Corporation initiated by Adrian Cheng Chi-kong, CEO of New World Development.
In an interview with our correspondence, Dr. Au King Lun, Executive Director of the Hong Kong Financial Services Development Council, points out that using the number of listings in these two years as reference, he would not be surprised to see dozens of companies to list in the form of SPACs in the next two years.
Compared with the Singapore market, Hong Kong’s market has higher requirements for SPAC investors. Presently, only professional investors can subscribe and trade SPAC shares in Hong Kong. According to the results of a consultation paper on SPAC by the Hong Kong Exchanges and Clearing (HKEX), 63% of the respondents support the above restriction because SPAC is such a new concept that retail investors may not understand the related risks involved, and their investment decisions are more easily affected by market volatility and rumors than professional investors do.
SPACs may involve trading risks that are not transparent; the listing requirements are unlikely to be relaxed this year
Au explains that since traditional IPOs are open to all investors, regulators have more stringent disclosure requirements for those companies. SPAC, on the other hand, are currently only open to professional investors who have sufficient understanding of the development and risks of the industry. They will do their due diligence before investing, so they do not need too much basic information about SPAC companies. He also points out that many retail investors do not know that there may be under-the-table transactions behind the scenes. Take the U.S. market as an example, there are many gray areas in its disclosure system. Since it does not require a SPAC to disclose its arrangement with individual institutional investors, there may be hidden privileges and preferences that are favorable to the initial sponsors but unbeknown to ordinary retail investors.
Global uncertainties may affect IPO market sentiment
Traditional IPO listings usually take one to two years to complete, but the time it takes to go public through SPAC can be shortened to just a few months. Some investors worry that more companies may choose SPACs for listing in the future, and that it can have a negative impact on traditional IPO listings.
Lloyd Chan, Senior Investment Strategist of wealth management at Citibank, says that the introduction of SPACs in Hong Kong will not have a significant impact on traditional IPO listings. For companies that are looking into going public before SPAC, it just provides a faster alternative for them to do so. But if the valuation through SPAC does not meet their expectations, they will still choose traditional IPO.
Chan also points out that SPAC provides more opportunities for companies that currently cannot meet the general listing requirements of the Main Board. However, there are still a lot of uncertainties in the market, including geopolitical changes and major central banks raising interest rates, all of which may create a wait-and-see attitude toward the long-term trend and dampen the sentiment in the IPO market.
With its regional advantage, Hong Kong is an attractive location for SPACs
Au maintains that even though there are certain limitations and unfavorable factors in the short term, Hong Kong still has many advantages in attracting Asia-Pacific SPAC companies. He points out that Hong Kong is the biggest trading market in the region, and a number of SPACs currently listed in the US markets are from Asia. Those companies are more recognizable here than in the U.S. and that should help attract capital to Hong Kong if they list through SPAC here.
Hong Kong is the world’s fourth-largest IPO market, with nearly HK$330 billion raised in 2021. Chan points out that Hong Kong is attractive to companies whose business focus is in the Greater China area, and this is especially true for tech firms and biotech companies. He thinks Hong Kong is an ideal market for SPACs aiming to attract potential investors in the region.
Responding to our inquiry on the future outlook of SPAC, the Securities and Futures Commission says that the current market mechanism for SPAC listings has already taken international market standards into consideration. Besides providing appropriate protections for investors, the Commission has also provided enough flexibility and incentives for developing a high-quality SPAC market. It will continue to monitor the SPAC-listing mechanism closely with the Hong Kong Exchanges and Clearing Limited (HKEX).