Hong Kong struggles to attract SPACs

Careful approach: Pedestrians walking outside the Exchange Square complex which houses the HKEX. The bourse has proposed that SPACs raise at least US$128mil when listing.— Bloomberg

HONG KONG: Hong Kong could have a hard time attracting blank cheque or special purpose acquisition companies (SPACs) after it proposed a high threshold to list in the city.

In a consultation paper, Hong Kong Exchanges & Clearing Ltd (HKEX) proposed that SPACs would need to raise at least HK$1bil (US$128mil or RM536mil) when listing and that retail investors would be barred from participating.

It also set an eligibility test for SPAC promoters, including having managed at least HK$8bil (RM4.3bil) for three years or possessing senior management experience at major listed companies.

The bourse has in the past been mired in scandals over shell companies and is now arguably taking the most careful approach to SPACs among major exchanges.

Singapore and New York have no minimum fundraising size, but have a market capitalisation requirement of US$112mil (RM469mil) and of between US$50mil (RM209mil) to US$100mil (RM419mil), respectively, according to the paper.

London, New York and Singapore also have no restrictions on retail investors.

“HKEX could struggle to attract SPACs with its conservative framework proposals,” said Sharnie Wong, a senior analyst at Bloomberg Intelligence.

The exchange, one of the world’s busiest in terms of initial public offerings (IPOs), could see a 8% boost in IPO volumes from SPAC listings, Wong estimated.

The exchange acknowledged its proposal was on the strict side, but argued it needed safeguards to “maintain Hong Kong’s reputation for high quality listings.”

It said that the minimum fund raising size would ensure that SPACs have the available funds to seek good high-quality targets.

Morgan Stanley sees limited upside to turnover at the bourse due to the stricter requirements than in other markets, analysts including Richard Xu said in a report.

SPACs are empty shells when they go public, raising money with the intention of buying and merging with another company.

They also typically will seek to raise more money later once they close in on a deal, but lately several SPACs in the United States have struggled to raise the additional cash.

Hong Kong may soon be followed by stricter rules in the United States.

The SPAC Index has dropped sharply from a peak in February amid increased regulatory scrutiny and poor performance of companies post-merger.

Earlier this month, Gary Gensler, the chairman of the Securities and Exchange Commission, assured Congress new regulations for the market are coming.

The Hong Kong bourse’s head of listing, Bonnie Chan, declined to offer an estimate on potential SPAC listings, but said she had met with “a lot of people expressing interest” over the previous months.

A total of US$4.2bil (RM17.59bil) was raised from 25 Greater China-based SPACs in the United States as of July 13.

An additional 12 companies from Greater China and South-East Asia debuted in New York via a de-SPAC, according to the exchange.

Still, of those 12, only four did so through an SPAC.

The exchange is also looking at a dual-track approach, where target companies of SPACs could apply for both a traditional IPO and de-SPAC with several such vehicles.

The city “may be better able to compete for Greater China listings if it was also able to offer such dual-track option,” it said.

“SPACs will be an alternative, complementary listing avenue,” Chan told reporters last Friday after the consultation paper was released.

“I don’t see that SPACs will encroach on the traditional IPO route.” — Bloomberg

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