On March 18, Hong Kong Exchanges and Clearing Limited (HKEX) welcomed the first IPO of a special purpose acquisition company (SPAC). The firm, Aquila Acquisition Corp, was greeted with a lukewarm reception by investors, and shares are trading about 3 percent lower than their initial listing price. While investor momentum may take time to catch up, there is a high demand for SPAC public offerings, and HKEX has reported that they have received 11 applications for additional SPAC IPOs.
While SPACs are already common in other major equities exchanges, including the New York Stock Exchange, Hong Kong has only recently given them the greenlight. In September 2021, HKEX released a consultation paper on SPACs, seeking feedback from market participants. After receiving substantial support for the idea, HKEX officially released guidelines for SPAC IPOs in January 2022.
SPACs come with unique regulatory oversight and investment issues, and, in their consultation paper, HKEX noted the SEC’s highlighted scrutiny of SPAC companies in the United States. Of primary concern is the large quantity of SPAC listings in the United States, which has created an oversupply for de-SPAC transactions, resulting in low-quality investments. IPO funds raised by U.S.-listed SPACs have risen dramatically in recent years. In 2019, proceeds from SPAC IPOs amounted to $13.6 billion. In the first half of 2021 alone, proceeds for these IPOS had reached a whopping $111 billion.
Beyond that, SPACs are prone to issues of shareholder protections and disclosure standards. Given that Hong Kong is a retail investor dominated market, which means that investors do not have the same capacity for private litigation as U.S. institutional investors, there must be certain assurances given to investors.
In order to ensure its reputation for high quality listings and investor protections, HKEX sought to create a unique framework for SPAC IPOs. Foremost, to prevent the speculation and market abuse that has arisen alongside the U.S. SPAC boom, Hong Kong has limited SPAC trading to professional investors only. Second, HKEX laid out stringent requirements for SPAC IPOs, including a minimum expected IPO market value of HK$1 billion.
By implementing relatively more stringent rules on both SPAC IPO requirements and share trading qualifications, HKEX will seek to uphold its reputation for market quality. Simultaneously, HKEX’s willingness to adopt these new SPAC listing rules expresses a goal to deepen financial markets in Hong Kong.
Hong Kong competes with other major financial hubs, including New York and London, to provide secondary listings for mainland Chinese and Southeast Asian businesses. According to HKEX’s consultation report, “In the last three years, 12 Greater China and Southeast Asian companies have listed in the US via a De-SPAC.” Also, Singapore and the United Kingdom have recently issued consultations on to introduce SPAC listing regimes within their own countries. So, offering this new way to market could be a key competitive advantage for Hong Kong in the near term.
As regulatory scrutiny of Chinese companies that are publicly traded in the United States intensifies, Hong Kong is uniquely positioned to offer safe haven to Chinese companies as a secondary listing or primary listing hub. The SEC even recently notified five Chinese public companies that they could be delisted if they fail to comply with required audits from the Public Company Accounting Oversight Board. Momentum has already been shifting, and this sensible move to welcome SPAC offerings in Hong Kong will help to move the needle further.