Special purpose acquisition companies (SPACs) have swiftly emerged as an alternative vehicle for global corporations that seek a public listing. As their name suggests, SPACs gather funds from investors through an initial public offering (IPO), with the intention of acquiring a current operating company (the “target company”) at a later stage. Following this acquisition process, the target company has the option to either merge with or be acquired by the publicly traded shell, thereby becoming listed instead of carrying out its own IPO.[1] SPACs present an efficient alternative to traditional IPOs, rendering them attractive to companies wishing to go public swiftly.
Beginning in 2020, a number of jurisdictions outside the U.S. either implemented corporate and securities law reforms or initiated discussions about incorporating SPAC listing requirements with certain U.S. characteristics, along with unique elements that cater to specific investment communities of each country. In a new paper, we analyze the regulatory frameworks governing SPAC listings in three prominent common law jurisdictions: the United Kingdom (UK), Singapore, and Hong Kong, and compare them with the legal framework in the U.S., where most SPAC transactions occur. By providing an in-depth comparative analysis of SPAC listing rules in London, Singapore, and Hong Kong, our article offers valuable insights for researchers, legal practitioners, policymakers, public companies, and their investors. The findings enhance our understanding of the strengths and weaknesses of the SPAC regulatory frameworks in each of the three jurisdictions, thus assisting stakeholders in making informed decisions.
UK, Singapore, and Hong Kong
The regulation of SPACs in the UK was revised significantly in 2021 by the FCA. Prior to the revision, there was a significant deterrent for SPACs listed in London, Listing Rule 5.6.8G, which typically mandates that any shell company (including a SPAC) would be compelled to undergo a suspension of listing when a potential acquisition target had been disclosed or when information about the proposed acquisition had been prematurely revealed. As a consequence, during the merger process and preparations for listing the enlarged group, all investors were effectively restricted from selling their shares, and any investors who disagreed with the acquisition could divest their shares until the process was completed. The updated listing standards allow the de-SPAC transaction without the presumption of suspension during the listing process, provided that the SPAC meets certain conditions.[2]
Under the new regulations, the FCA is striving to strike a balance between positioning London as an attractive hub for larger SPAC listings and ensuring robust safeguards for public investors. The FCA’s updated strategy aims to offer increased flexibility to larger SPACs and their investors, eliminating a substantial deterrent to listing in London. While it is still uncertain whether the new SPAC regulations will result in a surge of SPAC listings on the London markets, the potential for the UK to emerge as the next prominent SPAC-hub hinges on the extent to which the FCA adopts a flexible and market-oriented approach when evaluating and approving SPAC prospectuses and business combinations.
In Singapore, the SGX introduced new regulatory standards (Proposed Listing Framework for Special Purpose Acquisition Companies) that officially permitted SPACs to be publicly listed on its mainboard from September 3, 2021.This decision was designed to solidify Singapore’s status as a premier global financial centre, attract the listing of successful tech companies, and meet the demand of local wealthy investors for higher- risk investments.
Singapore ranks as the world’s fourth largest and most influential financial center, after New York, London, and Hong Kong. However, there is still a significant gap between the Singapore capital market and the world’s top capital market. Therefore, the inclusion of SPACs in Singapore’s stock market substantially contributes to strengthening it. This move will also enhance the reputation and quality of public share offerings in Singapore, akin to the impacts of NASDAQ and NYSE.
Singapore will likely attract technology start-up listings from ASEAN and South Asia that would have chosen a U.S. listing previously. When Asian companies list in Singapore, they can save effort and costs associated with adapting to U.S. financial accounting and corporate governance standards. This is because, unlike most U.S. public companies whose ownership is dispersed, ownership of Asian companies is typically concentrated among major shareholders or within a small group of family members. Hence, should Singapore position itself as a burgeoning SPAC hub in Asia, wealthy families and individual investors in the region may redirect some of their investments from international markets to Singapore, due to their similar investment landscape and culture.
In Hong Kong, the HKEX and the Securities and Futures Commission (SFC) were requested to test the feasibility of creating a SPAC listing framework in March 2021. In September 2021, HKEX released a public consultation document soliciting input to its plan for a sound and effective listing framework for SPAC transactions in Hong Kong. After a two-month consultation, on December 17, 2021, HKEX implemented the proposed measures with slight modifications to incorporate the feedback. These new regulations took effect on January 1, 2022.
Given its history with fraudulent companies, HKEX was concerned about potential abuses that SPAC might bring to its capital markets. As a result, HKEX took a highly cautious strategy towards SPAC regulation, even though it wanted to compete in the global SPAC market. According to the consultation paper, the Hong Kong exchange was not capable of replicating the American-style SPAC market structure because of Hong Kong’s larger retail market and the U.S.’ reliance on private litigation to curtail unfair practices. It attributed de-SPAC failures in the U.S. to market oversaturation with SPACs and few viable de-SPAC targets. To weed out flawed de-SPAC transactions, HKEX implemented stricter regulations on SPAC listings compared with the U.S., UK, or Singapore.
Comparative Analysis of SPAC Regulatory Approaches
The decision of companies as to where to go public is influenced by various factors, with the primary considerations being valuation and liquidity. Factors such as the robustness of the regulatory framework, the level of analyst coverage, and the size of the investor base also play significant roles. Other considerations include the cost of listing, the convenience of location, and the efficiency or speed of the listing process. Therefore, stock exchanges and their regulators in the UK, Singapore, and Hong Kong have been updating their regulations on SPACs and striving to establish themselves as credible alternatives to the U.S. This has led to the emergence of competitors challenging the existing players. A new competitive landscape is evolving among these three exchanges, marked by issuer-friendly adjustments to rules and requirements aimed at attracting unicorns and companies engaged in developing next-generation technologies.
To establish a solid foundation, the regulatory authorities from London, Singapore, and Hong Kong all have relied on the U.S. regulations and practices while formulating their own frameworks. This approach aims to incorporate familiar practices that resonate with the market and enable the LSE, SGX, and HKEX to be attractive listing destinations for SPACs. By emphasising the compulsory nature of the UK, Singapore, and Hong Kong frameworks, the authorities have ensured that all market participants are guaranteed a basic level of protection. Simultaneously, all three countries have enhanced investor protection and tackled concerns associated with the SPAC structure, including conflicts of interest and dilution issues. However, the implementation of the SPAC framework and the subsequent listing of SPACs in these three jurisdictions represent only the initial stage in the process of establishing a robust SPAC market. The likelihood of the three common law countries becoming significant SPAC hubs globally depends on the authorities’ willingness to adopt a flexible and market-oriented approach, as well as their ability to fine-tune their regulations.
ENDNOTES
[1] SEC, ‘What You Need to Know About SPACs—Updated Investor Bulletin’ (2021). https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need- know-about-spacs-investor-bulletin.
[2] These conditions include the requirements on the £100m minimum capital threshold, ring-fencing of proceeds, time limit of two years for the acquisition (maximum of three years), adequate approval process, redemption option for investors, and disclosure requirement. Any SPAC that fail to meet these criteria would still pursue its listing, but will remain subject to the presumption of potential suspension.
This post comes to us from Lerong Lu and Ci Ren at the Dickson Poon School of Law, King’s College London. It is based on their recent paper, “Innovating Corporate Share Listing Frameworks: A Comparative Study of SPAC Regulatory Regimes in the United Kingdom, Singapore, and Hong Kong,” published by Asia Pacific Law Review and available here.