SPACs are in the news this week, after Silicon Valley’s pioneer in the investment vehicle business said he would return US$1.5 billion to backers. But Hong Kong’s versions of the Special Purpose Acquisition Company have key differences, says SPAC specialist Jason Wong
THE U.S. ENTERED AN interest rate hike cycle this year, and capital markets on the whole have experienced a significant slump.
The special purpose acquisition companies (SPAC) market has also been hit, with a significant decline in the number of IPOs and the scale of fundraising compared to a year ago.
More importantly, the U.S. Securities and Exchange Commission released a draft regulation for SPACs at the end of March, which led to decreased investor appetite from some headline investment banks.
Due to the macro environment, the performance of the Hong Kong SPAC market has also fallen short of expectations, with only three SPACs approved for listing followed by low post-listing trading volumes as of the end of August.
Given the above, many are pessimistic about the future of SPACs in Hong Kong.
UNIQUENESS OF HONG KONG MODEL
However, I believe that we should have confidence in Hong Kong SPACs because of their unique advantages. Hong Kong’s SPAC listing model itself has the traditional advantage of providing investors with a capital preservation mechanism at the IPO stage, which is rare in times of market downturn.
Hong Kong has optimized the listing rules for its SPACs based on its traditional advantages, including:
1) strict requirements for promoters in terms of their background, qualifications and past performance in their fields;
2) the requirement for targets to comply with all new listing requirements;
3) the requirement for targets to appoint at least one sponsor; and
4) the introduction of mandatory public investment in private equity (PIPE) in the event of a merger.
These requirements help good promoters to find and merge with quality target companies.
ELEMENTS WHICH NEED TO BE FIXED
Naturally, there are still some shortcomings in the Hong Kong SPAC listing rules that will adversely affect the long-term development of SPACs in Hong Kong.
For example, trading is restricted to professional investors before the merger, which is the main reason for the low trading volume of SPACs after listing. The dilution limit for warrants of Hong Kong SPACs is capped at just 50%, which is not attractive enough for investors.
Additionally, along with the mandatory PIPE requirement, the target company is also required to meet the public shareholding requirement of no less than 25% (or between 15% and 25% for companies with a market capitalization greater than HK$10 billion), which significantly increases the difficulty of financing SPACs when they merge with their target.
As such, one hopes that the Exchange will listen to market feedback and make corresponding assessments and adjustments so that the SPAC market in Hong Kong can continue to develop in a healthy manner.
Jason Wong is CEO of Norwich Capital Ltd.
Image at the top by Cheung Yin/Unsplash