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Law and border: Plans for Hong Kong SPACs are far from straightforward

Hong Kong wants to woo start-ups back, but it may have its work cut out for it.

As of the end of October 2021, SPACs with Asian sponsors collectively raised US$4.8 billion from 41 deals, reflecting a 91% growth in value and a more than tripling in volume, according to Dealogic data. It's an undeniably positive trend.

However most, if not all, of the SPAC listings sponsored by Asian funds or individuals in the past two years have floated on US exchanges.

But this may all be changing— the Hong Kong Stock Exchange has proposed a SPAC listing framework that it hopes will see sponsors see it as the bourse of choice in the region. What does this mean for corporates in APAC considering their SPAC options?

1/ Strictly speaking, this is not going to be an easier proposition

SPACs are meant to be a quick and easy way for start-ups to access the public markets. Relative to other regions, Hong Kong's proposed rules are anything but that.

The proposals require the target company to have at least three years of financial records—identical to existing rules for regular IPOs. Add to that a HK$1 billion market cap threshold and there's little reason for a start-up to opt for a SPAC at all when they can just go the traditional route, especially when you factor in proposed restrictions on retail investors participating.

The only real draw for a start-up to choose to partner with a cash shell in Hong Kong is if it has the backing of a celebrity or industry magnate that can either help steer the company, or, at least, help drum up interest.

2/ Some may choose a Hong Kong SPAC simply to stay closer to home

Despite the restrictions, some Asian sponsors are eyeing to file for their Hong Kong SPAC listings in the first quarter of 2022, meaning their journey of finding de-SPAC targets will start soon.

China has a vested interest in Hong Kong's plans panning out. It would no doubt prefer Chinese innovators to trade in Asia than on the Nasdaq. It is therefore expected that at least some start-ups in the country will choose Hong Kong SPACs, even if the rules leave much to be desired.

3/ Learn from experience

The fate of Chinese mobile ride hailing app Didi Global may encourage start-ups to have a change of heart about potential SPACs.

In July, the Cyberspace Administration of China called on the company to stop accepting new users, citing the country's Cybersecurity Law and saying that the app "has serious violations of laws and regulations pertaining to the collection of personal information”. Didi's share price has yet to recover.

For any tech start-ups dealing with potentially sensitive user data belonging to Chinese citizens, the US market may not look quite as attractive as it once did. Perhaps Hong Kong's latest efforts will be more successful than these rules first suggest.

Compare and contrast: SPAC rules in HK, Singapore and the US