More than a year after special purpose acquisition companies took US stock exchanges by storm, Hong Kong is dipping its toes into the market. But is it a case of too little, too late?
The Spac craze began to take hold in Asia this year after it boomed in the US in 2020. Hong Kong and Singapore, ever the competitors, have been eager to get in on the action.
Singapore got there first, introducing a rather issuer and investor friendly listing framework in early September. Hong Kong, on the other hand, published a consultation paper last Friday seeking comments on its proposed framework — which is notable for its restrictions. Granted, the exchange has a troubled past with shell companies that have been used to avert regulations through so-called backdoor listings, but its Spac proposals show the challenges it faces.
Hong Kong is looking to set a minimum fundraising size of HK$1bn ($128.46m) with a price floor of HK$10.00 per share. Neither Singapore nor the US have a fundraising requirement. Spacs often raise less than $100m in the US. Instead, the Singapore Exchange and New York’s bourses require a minimum market capitalisation of S$150m ($111.07m) and $50m to $100m, respectively. The SGX also has an IPO floor price of S$5.00 per share.
Moreover, the Hong Kong exchange is keeping out retail investors, which won’t be able to invest in Spac IPOs or trade their securities in the secondary market.
Arguably, this is a good thing. Spacs have often been criticised for luring in mom and pop investors that don’t understand what they are buying. But regardless, retail is a key investor base in the asset class. Retail accounts don’t face restrictions from buying Spac shares in Singapore, the US or the UK. The SGX, in fact, is allowing retail in, as well as playing it safe by working with local investment groups to increase understanding of Spacs.
The Hong Kong public has shown a propensity to speculate on new listings, as reflected in the way many stocks this year soared on their debuts before correcting sharply a few days later. Spacs are not as exciting as the latest technology or healthcare company but there will no doubt be some interest. Hong Kong needs the buying power of retail investors. Teaching them what they are buying could be a decent compromise.
The HKEX is, of course, aware that it’s taking a cautious approach to Spacs, highlighting in the announcement of its consultation paper that the framework was designed to maintain its reputation as a stable secondary market and top IPO destination.
It doesn’t stop there, however. Hong Kong’s conservative approach also extends to the people running Spacs.
Spac promoters, known as sponsors in other markets, establish and manage a Spac. The HKEX’s draft rules include safeguards that ensure Spac promoters will be “experienced and reputable”. The proposed tests for whether promoters are suitable include having managed at least HK$8bn in assets for three consecutive years, or having executive level experience at a listed company featured in the Hang Seng index or an equivalent benchmark index.
These requirements limit the scope of potential promoters and, therefore, listings. But the broader question for Hong Kong still remains: who would want to list through a Spac?
Hong Kong’s IPO business had a booming first half of the year. The fourth quarter is expected to be equally busy, with a raft of listing applications in the pipeline.
Spacs have most commonly been targeting new economy sectors. But shares of companies in the industry have been flying off the shelves in the city’s IPO market. And after Beijing’s summer crackdown on overseas listings by homegrown technology firms, the HKEX is no longer competing with New York for China’s prospective tech issuers.
Listing by merging with a Spac does have its benefits: the ease of having no public IPO roadshows and being able to determine a company’s valuation privately are just two of them. But given the hot Hong Kong IPO market, issuers have already been getting away with punchy valuations.
If Hong Kong is serious about Spacs, it needs to loosen up the rules drastically to make the market appealing. If the traditional IPO business picks up the way bankers are predicting, Spacs may remain a novelty yet in Hong Kong.