HKEX is preparing to consult the market by end-June at the earliest. However, market participants believe the odds are low that SPACs will be allowed in Hong Kong.
Hong Kong’s SFC (Securities and Futures Commission) is reportedly having doubts about whether to allow SPACs (special purpose acquisition companies) to list in the city.
Earlier this year, Financial Secretary Paul Chan directed the SFC and HKEX (Hong Kong Exchanges and Clearing) to explore the possibility of introducing SPAC listings in Hong Kong.
According to Sing Tao Daily, market participants have indicated that the SFC has doubts, though HKEX is preparing to consult the market by the end of June at the earliest. Still, the newspaper said securities market participants believe the odds of SPACs being allowed in Hong Kong are low.
SPACs, also known as “blank check companies”, are companies that are formed strictly to raise capital through an IPO for the purpose of acquiring an existing company. They are considered an easy option to go public and raise funds, allowing firms to circumvent lengthy IPO and due diligence procedures.
SPAC listings in the US have reportedly raised more than USD 100 billion so far this year, surpassing the 2020 total. However, Reuters has found that over 100 SPACs that announced mergers this year have gained on average under 2 percent from the price they traded at when they first listed.
The SPACs frenzy has prompted exchanges in Singapore and Indonesia to also explore the possibility of allowing SPAC listings in their markets. Meanwhile, regulators in the UK are consulting on changes to the existing SPACs framework, while in the US they are tightening supervision.
The Sing Tao Daily report highlights concerns that HKEX could send the wrong message by allowing SPAC listings in Hong Kong, given that its October 2019 listing rule changes were in part aimed at cracking down on shell companies.
While there appears to be little confidence among industry participants that SPACs will be allowed in Hong Kong, the paper notes that some securities firms have been preparing to “respond positively” to the future introduction of SPACs in the city.
If SPACs are introduced, investor safeguards need to be in place.
In Singapore, SGX’s proposed framework includes requirements for investor funds to be placed in escrow pending an acquisition target being identified, while also allowing for investor money to be returned if they vote against the proposed acquisition, among other safeguards.
In the UK, the FCA has likewise proposed amendments to ensure investors are protected, such as the introduction of a time limit on a SPAC’s operating period if no acquisition is completed, ring-fencing of investor money, and a redemption option to allow investors to exit before any acquisition is completed.