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Since the implementation of the Hong Kong listing regime for special purpose acquisition companies (SPACs) on 1 January 2022, 11 SPACs have lodged listing applications (see a summary of these cases at the end of this article) with The Stock Exchange of Hong Kong Limited (Exchange) as of 23 March 2022, with the first one having made its debut on 18 March 2022. We are currently advising the sponsor in relation to one of these SPAC listing applications which was lodged in mid-February 2022. We expect a strong pipeline of SPAC listings in Hong Kong this year.
Our previous client alert “Overview of Hong Kong’s listing regime for special purpose acquisition companies (SPACs)” issued in early January 2022 summarises the key features of the SPAC listing regime. Please note that capitalised terms such as “SPAC Shares” used in this article are explained in that alert. On 4 March 2022, the Exchange published a new guidance letter (HKEX-GL114-22) providing guidance on the qualifications and obligations of the trustee or custodian regarding the operation of the escrow account of a SPAC for ring-fencing the IPO proceeds. This guidance letter has addressed many of the questions we have received at the time when the SPAC listing regime first became effective from our trustee and custodian clients surrounding their qualifications and obligations in the context of a SPAC listing.
In this article, we will provide some insights on a few issues that potential SPAC Promoters (i.e. persons who establish a SPAC and/or beneficially own “Promoter Shares” issued by a SPAC exclusively to such persons at nominal consideration, commonly known as “sponsors” in the United States) may be interested to know.
Would (a) a SPAC Promoter controlled by a licensed firm / individual or (b) a SPAC Promoter structured as a fund managed by a licensed general partner fulfil the licensing requirement?
At the listing of the SPAC and on an ongoing basis for the lifetime of the SPAC, the Exchange must be satisfied as to the character, experience and integrity of a SPAC Promoter and that it is capable of meeting a standard of competence commensurate with its position. Section A of the Exchange’s guidance letter (HKEX-GL113-22) sets out the information that a potential SPAC Promoter must provide to the Exchange and the factors that the Exchange will take into account when considering the suitability of the SPAC Promoter.
To help ensure high quality SPAC Promoters and better alignment of interest with other SPAC investors, the Hong Kong listing regime specifically requires that at least one SPAC Promoter must be a firm that holds a type 6 (advising on corporate finance) and/or a type 9 (asset management) licence issued by the Securities and Futures Commission (SFC).
The Exchange will consider a SPAC Promoter that does not hold the requisite SFC licence to have met the requirement, if its controlling shareholder (which is a licensed corporation) satisfies the requirement, provided that: (a) the SPAC demonstrates to the Exchange that sufficient safeguards and/or undertakings are put in place to ensure the controlling shareholder’s oversight of the SPAC Promoter’s responsibilities; and (b) the controlling shareholder gives an undertaking to the Exchange that they will ensure the SPAC Promoter’s compliance with applicable Listing Rules. For the avoidance of doubt, the licensing requirement cannot be satisfied by an individual who holds a type 6 or type 9 licence.
If the SPAC Promoter is structured as a fund in the form of a limited partnership, the licensing requirement would apply to the general partner of the fund as it assumes ultimate responsibility for its management and control. This follows the same approach as the principles in Part A of the SFC’s circular to private equity firms seeking to be licensed issued on 7 January 2020.
SPAC Promoters are also reminded that if they conduct activities that fall within the scope of regulated activities, they should consider whether there are any possible licensing or other implications under the Securities and Futures Ordinance (SFO).
Potential conflict of interests / competition
The Hong Kong listing regime imposes the following requirements for directors of a SPAC:
Directors and officers of a SPAC who are also officers or other employees of the SPAC Promoters may be involved in the investment activities of the SPAC Promoters. They may also be involved in the management of other SPACs that the SPAC Promoters will promote in the future. Potential conflicts of interest may arise when the SPAC Promoters are seeking suitable investment opportunities similar to those of the SPAC for a De-SPAC Transaction. To assist investors to make an informed assessment of the potential conflicts of interest, the offering circular of the SPAC should disclose:
Can a SPAC Promoter or its close associate participate in the SPAC’s IPO?
Paragraph 5(1) of Appendix 6 to the Listing Rules provides that no allocation of securities will be permitted, without the prior consent of the Exchange, to existing shareholders of the listing applicant or their close associates. According to the Exchange’s Guidance Letter HKEX-GL113-22, the Exchange may allow a SPAC Promoter to participate in the offering of SPAC Shares at the time of the initial listing of a SPAC subject to the following conditions being satisfied:
However, as indicated in the offering circular of the first listed SPAC, which disclosed that a close associate of one of the SPAC Promoters proposed to participate in the SPAC’s IPO by subscribing for the SPAC Shares offered, the close associate will be subject to certain restrictions imposed on SPAC Promoters in respect of its SPAC Shares and SPAC Warrants, including:
It remains to be seen whether these will become standard conditions whenever a SPAC Promoter and/or its close associate(s) seeks to participate in a SPAC’s IPO.
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