Hong Kong SPAC adds new players, how should enterprises and investors “taste fresh”?

2022-06-19 0 By

Another SPAC has applied to list on the Hong Kong Stock Exchange.According to the documents disclosed by the Hong Kong Stock Exchange on February 14, the SPAC, named Ace Eight Acquisition Corporation, is a newly registered Cayman Islands exempted company, initiated by Ace Promoter and Assos Omada Promoter,Zhongyi Furniture, one of the shareholders of the former, is an indirect wholly-owned subsidiary of Hong Kong listed company Huangchao Home (01198.HK).”SPAC products have been developed in the US for a long time and the market is relatively mature, but the SPAC regulations in Singapore and Hong Kong mark the product’s formal inclusion into the Asian market system.”Wang Jing, managing director of investment banking at CICC, told Forbes China in an exclusive interview.SPAC has seen explosive growth in the past two years.According to SPACInsider, in 2019, there were 59 PUBLICLY traded SPacs in the US, raising a total of $13.6 billion. By 2020, those numbers had soared to 248 and $83.3 billion, respectively, and further to 613 and $162.5 billion in 2021.On September 3, 2021, the SGX’s SPAC listing mechanism came into effect.In December of the same year, the Hong Kong Stock Exchange also announced the establishment of SPAC listing mechanism.Five SPacs, including Ace Eight Acquisition Corporation, have so far applied to list on the Hong Kong Stock Exchange,The remaining four are Aquila Acquisition Corporation, co-sponsored by China Merchants International Asset Management, Tiger Jade Acquisition by Taixin Capital and Longstone Capital, Li Ning and Trinity by two private equity firmsAcquisition Holdings Ltd., and Interra Acquisition Corporation, with primavera Capital, ABC International Asset Management and others.It is understood that the full life cycle of SPAC products involves IPO business, “m&a” business in the business merger stage and “private placement” business looking for outside investors.Therefore, the development of SPAC business requires intermediary agencies to have a high degree of professional ability, all-round business coverage ability, multinational and cross-market multi-regional teams, a deep understanding of the capital market and SPAC products, and a precise grasp of the demands of SPAC companies, companies to be listed, and market investors.In 2019, cicC set up a SPAC team with SPAC experts from Mainland China, Hong Kong, Singapore, the United States and other places based on the forward-looking layout of the SPAC market.At present, CICC has submitted listing documents for 2 SPAC IPO projects in the US market, completed 2 business merger transactions, and announced 3 business merger transactions. Cicc has completed listing of 1 SPAC IPO project in Singapore market, and it is the first SPAC company to be listed in SGX.In addition, CICC has several reserve projects in the US and Hong Kong markets under execution.According to Wang Jing, from the perspective of supervision, the SPAC regulations of Singapore, Hong Kong and the United States have been adjusted according to the characteristics of their respective markets under a relatively unified overall framework.For example, the United States and Singapore have no additional qualification requirements for participants in SPAC IPO and SPAC promoter qualification, while Hong Kong requires that only professional investors can subscribe for SPAC IPO and SPAC promoter shareholders must include licensed institutions.In addition, there is no cap on the dilution of shares and warrants of SPAC promoters in the US, while Singapore and Hong Kong have a 50% cap on the dilution of warrants and a 20% cap on the dilution of shares (excluding additional shares issued under the earn-out mechanism).”For Asian regulators, introducing a new product requires a combination of diversification and flexibility, while maintaining stability and order in the market and some protection for small and medium-sized investors.Appropriate regulatory constraints can help SPAC develop in an orderly and healthy way in the early stage, so as to better integrate into the existing market system.”According to Wang jing, SPAC and traditional IPO have their own unique advantages, but the former has three core differences: first, flexible structure.Since the essence of SPAC business merger transaction is a merger transaction, its transaction structure can be set according to the demands of the parties to the transaction, which reflects a higher flexibility.For example, in the business combination, assets can be restructured based on the business situation, and certain commercial clauses can be added to the business combination agreement to personalize the commercial demands of both parties.Second, increase the certainty of valuation.The valuation of enterprises listed through SPAC is mainly based on the negotiation between SPAC company and the company to be listed, and the agreement is made through the signing of the merger agreement, so the valuation of the company to be listed can be determined at the early stage of the transaction.In contrast, the valuation of traditional ipos is determined at the end of the offering pricing process.In addition, because the valuation of SPAC company is determined through negotiation between the two parties, it is more favorable to some enterprises whose business model is more complex, technology is more sophisticated, and their performance is still in the development stage but not fully released.These companies can search the market for SPAC companies with industry knowledge, in-depth understanding of the company’s technological advantages, and confidence in the company’s future performance, so as to obtain a valuation level that better reflects the growth potential of their performance than traditional IPOS.Third, provide shareholders with exit opportunities.In traditional IPO, except a few old shares can be sold in the IPO stage, to shareholders of the listed companies in need can be realized through the secondary market in the IPO rear exit, but if by SPAC listed, the early part of the listed company financial investors can be in the business merger phase, namely by requiring SPAC company pay cash consideration to realize synchronous exit.That allowed them to cash in on their investment returns, making SPAC products more attractive to shareholders in such companies.”The SPAC system has injected more vitality into the market and provided a richer choice of financial instruments for companies to go public, so that companies can choose their own way to go to the market.Generally speaking, THE SPAC system is more suitable for high-tech companies with complex business models and high potential performance that has not yet been fully released, as well as companies with high requirements for transaction valuation certainty and personalized shareholder demands.”Wang Jing said.For companies preparing to go public in Hong Kong through SPAC, Wang Jing believes that the following points should be paid attention to: first, under SPAC system, the share of sponsors and warrants have a certain dilution of the share proportion of the company to be listed.Second, it is necessary to obtain investment from independent third-party PIPE investors of a certain scale through SPAC listing, so we need to focus on whether we can find qualified investors to participate in this business merger transaction.Third, shareholders of SPAC may choose to exercise the right of redemption, thus bringing uncertainty to the financing scale of the company to be listed through SPAC.Fourth, the financial situation and compliance operation of the company to be listed still need to meet the IPO qualification requirements, and the sponsor still needs to be hired in the business merger stage.For investors, the SPAC’s complex operations could pose risks.Take the practice of the US market as an example.The promoters of the SPAC will be responsible for managing the SPAC company from inception to completion of the merger and will receive a percentage of the outstanding shares of the listed company at the lowest cost as a reward for founding and managing the company.Importantly, these promoters’ shares are different from listed shares sold to investors because the promoters’ shares cannot be traded until the merger is completed.Shares cannot be liquidated until the merger is completed, so SPAC promoters have a strong incentive to push for a merger with the target company.Even if it is a loss-making activity, the inherent costs of the SPAC, which are not borne by the originator or target company, will be passed on to shareholders who do not redeem their shares.In addition, in order to complete the merger, the promoters must raise additional capital by selling shares to new shareholders after the SPAC IPO.Studies have found that shares are sold at a discount, and the cost is passed on to shareholders who do not redeem their shares.Because of the potential risks, Hong Kong has a higher threshold for investment in the SPAC IPO phase than the US and Singapore.Since Hong Kong’s SPAC rules put more stringent requirements on the professional qualifications of sponsors and the investment ability of SPAC companies, this is equivalent to a protection for investors.Ms Wong pointed out that for investors in the merger phase of SPAC business, as PIPE investment is required in Both Hong Kong and Singapore (in Singapore, the absence of PIPE investment will result in additional independent financial adviser appointment obligations, while PIPE investors are required in Hong Kong),Therefore, the importance of PIPE investors in Singapore and Hong Kong during the business merger phase will become more prominent.