Letters | Hong Kong’s embrace of SPAC listings must strike balance on all interests

The proposed rules on SPAC listings must take care not to increase uncertainty among investors and diminish Hong Kong’s appeal as an investment destination
If done well, Hong Kong could stand to benefit from more listings amid the mainland’s regulatory crackdown and rising geopolitical tensions

Hong Kong Stock Exchange

Letters

Published: 5:30am, 2 Nov, 2021

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The Hong Kong stock exchange has published a consultation paper on special purpose acquisition companies (SPACs). Having successfully launched four SPACs listed on Nasdaq in the United States, with two more listings under application, I believe the competitive edge in SPAC listings depends on the high certainty of listing, short approval periods and controllable costs.

The prime consideration for Hong Kong in introducing SPAC listings should be how to balance the interests of SPAC promoters, investors and target companies.

The exchange’s proposed rules tie SPAC investors’ share redemption rights with opposing votes and say a de-SPAC transaction – such as the acquisition of a business – must be approved by shareholders. These measures will increase the uncertainty over the de-SPAC transaction and increase the risk of SPAC liquidation. The adverse impact of such measures has been shown in the US, leading to rule amendments there in 2015.

The proposed rules include a 30 per cent cap on dilution from the exercise of warrants, which is likely to diminish the appeal of Hong Kong SPACs to investors. A de-SPAC target valuation is usually several times a SPAC’s IPO proceeds.

The dilution effect upon the exercise of warrants in a successor company, or listed issuer following the completion of a de-SPAC transaction, is not as significant as some imagine. The warrant exercise price – normally US$11.50 in the US – is usually higher than the subscription prices of a SPAC IPO and private investments in public equity, allowing the successor company to secure further financing and increase the size of its public float.

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The proposed rules might also allow listing applicants to take a “dual-track” approach so they can simultaneously apply for a traditional IPO and a SPAC listing. However, such an arrangement might be unfair to SPAC promoters as SPACs are subject to merger deadlines and face liquidation if they fail to complete the merger within the given time frame. The “dual-track” approach would increase the risk of de-SPAC transaction failure or liquidation.

Hong Kong’s status as an international financial centre puts it in an advantageous position in attracting global capital. With mainland China as its hinterland, Hong Kong is able to access a reservoir of technology companies.

Furthermore, the regulatory issues around Didi Chuxing and rising US-China tensions could mean tightened supervision on mainland enterprises listing in the US. For mainland tech companies, this could increase the appeal of SPAC listings in Hong Kong.

Jason Wong, founder and CEO, Norwich Investment Limited

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