Updates

On 23 August 2024, the Hong Kong’s Securities and Futures Commission (HK SFC) and The Stock Exchange of Hong Kong Limited (the Exchange), a subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), jointly announced temporary amendments to the Listing Rules, as outlined under Main Board Listing Rule 2.04. The amendments affect the listing pathways and requirements for Specialist Technology Companies and Special Purpose Acquisition Companies (SPACs) in Hong Kong with a focus on the requirements for specialist technology companies and De-SPAC transactions conducted by SPACs. The modifications will be effective from 1 September 2024.

A Specialist Technology Company is defined as a company that engages in the research, development, commercialisation, and/or sale of products or services that utilise science and/or technology within an approved sector of the specialist technology industries, as specified in Chapter 2.5 of the Guide for New Listing Applicants. Chapter 18C of the Main Board Listing Rules provides a listing route for these companies, particularly those that do not meet the broader eligibility criteria under Chapter 8 of the Main Board Listing Rules. Within this framework, Specialist Technology Companies are classified into two categories i.e. Commercial Companies, which have generated at least HK$250 million in revenue during previous audited financial year, and Pre-Commercial Companies, which have not yet reached this Commercialisation Revenue Threshold at the time of listing.

A SPAC (Special Purpose Acquisition Company) is essentially a blank-cheque company established to raise capital through an IPO with the intention of acquiring an existing company or business referred to as a De-SPAC Target, within a specified timeframe. Chapter 18B of the Main Board Listing Rules and Chapter 2.4 of the Guide for New Listing Applicants outlines the regulatory framework for SPAC listings in Hong Kong, including the criteria they must meet for De-SPAC Transactions. SPACs must secure the necessary minimum independent third-party investment before announcing a De-SPAC transaction.

In this context, Sophisticated Independent Investors (SIIs) play an important role, particularly in Specialist Technology Companies, where their qualification requirements and independence standards are detailed in Chapter 2.5 of the Guide for New Listing Applicants. The listed entity resulting from the successful completion of a De-SPAC transaction is known as the Successor Company. For both Specialist Technology Companies and SPACs, ensuring the independence of key investors, such as those meeting the criteria outlined in Main Board Listing Rule 18B.40 and consistent with those applicable to independent financial advisers under Main Board Listing Rule 13.84, is vital for maintaining the integrity of the listing process and protecting investor interests.

According to the updated guidelines, at least one SPAC Promoter must hold a Type 6 (advising on corporate finance) and/or a Type 9 (asset management) license issued by HK SFC. This requirement is mandatory at the time of listing and must be maintained throughout the SPAC’s lifecycle. The Exchange may consider waiving this requirement if a SPAC Promoter possesses equivalent overseas accreditation from a regulatory authority recognised as equivalent to the SFC’s standards.

To qualify for a waiver, the SPAC must provide documentary evidence of the Promoter’s accreditation and a detailed comparison of the initial and ongoing requirements that the SPAC Promoter must fulfill under this accreditation compared to those of the HK SFC’s Type 6 and Type 9 licenses. If the SPAC Promoter does not hold the requisite HK SFC license, the licensing requirement can be met if the Promoter’s controlling shareholder meets the requirement, provided there are sufficient safeguards in place. These safeguards include ensuring the controlling shareholder’s oversight of the SPAC Promoter’s responsibilities and an undertaking to the Exchange to ensure compliance with all applicable Listing Rules.

SPAC Promoters have to demonstrate substantial experience in either managing assets with an average collective value of at least HK$8 billion over a continuous period of at least three financial years or holding a senior executive position, such as a CEO or COO, at an issuer that is or has been a constituent of a major index like the Hang Seng Index or an equivalent flagship index. The Exchange will assess these criteria on a case-by-case basis, considering the Promoter’s overall experience, past performance, and ability to meet the Exchange’s standards for competence and integrity.

Independence Requirements for Third-Party Investors

The independence requirements for third-party investors involved in De-SPAC transactions have been tightened. Under the revised guidelines, the independence of a third-party investor is determined from the date of signing the definitive agreement for the investment in the De-SPAC transaction and continues until the listing of the Successor Company.

Following categories of individuals and entities are automatically excluded from being considered independent third-party investors. These include:

1. Individuals or entities classified as core connected persons of either the SPAC or the De-SPAC target are not deemed independent.
2. Any controlling shareholder of the SPAC or the De-SPAC target, along with persons within the group of controlling shareholders, are disqualified from being independent third-party investors.
3. The founders of the De-SPAC target and their close associates are also excluded from being considered independent.

The Exchange retains the discretion to deem any person or entity as not independent based on specific circumstances.

Sophisticated Independent Third-Party Investors

The guidelines for identifying and qualifying sophisticated independent third-party investors in De-SPAC transactions have been updated so that investments comes from well-qualified, experienced investors. According to the new regulations, at least 50% of the value of the independent third-party investment required under Main Board Rule 18B.41 must be contributed by no fewer than three sophisticated investors.

The Exchange will assess whether an investor is sophisticated on a case-by-case basis, based on investor’s relevant investment experience, their knowledge and expertise in the relevant field of the De-SPAC target, and financial metrics such as net assets, assets under management (AUM), or the size of their investment portfolio.

For cases where the investor does not fit the traditional molds, the Exchange may still consider them sophisticated based on specific circumstances. The applicant is responsible for demonstrating that these investors possess the necessary investment experience, knowledge, and expertise. The applicant must disclose detailed information regarding the size and basis of the AUM, fund, or investment portfolio of these sophisticated investors in both the De-SPAC announcement and the listing document. This disclosure must be current, with data no older than six months from the date of signing the definitive investment agreement or the listing application of the Successor Company.

Minimum Independent Third-Party Investment Thresholds

The amendments to the minimum independent third-party investment thresholds for De-SPAC transactions, the total funds to be raised from independent third-party investors must constitute at least the prescribed percentage of the negotiated value of the De-SPAC target as outlined in Main Board Rule 18B.41, or HK$500 million in value, whichever is lower. This adjustment is part of a temporary modification that will apply from 1 September 2024 to 31 August 2027.

Specialist Technology Companies

The updated guidelines introduce specific requirements for Specialist Technology Companies, focusing on the minimum initial market capitalisation needed for listing and additional criteria that must be met to qualify for listing.

The minimum initial market capitalisation at the time of listing is adjusted based on the type of Specialist Technology Company. Commercial Companies must have an initial market capitalisation of at least HK$4 billion and Pre-Commercial Companies must have an initial market capitalisation of at least HK$8 billion. The company must demonstrate ownership continuity and control in the 12 months prior to the listing application and up until the offering or placing becomes unconditional. The Exchange may grant waivers on a case-by-case basis, particularly for companies listed through a De-SPAC transaction. A commercial company is expected to show year-on-year revenue growth throughout the track record period. Temporary declines are acceptable if they are due to factors outside the company’s control, such as economic conditions. Companies must explain any downward trends and outline remedial steps to the Exchange’s satisfaction. Pre-commercial companies must demonstrate that the primary reason for listing is to raise funds for the research and development (R&D), manufacturing, or marketing of their Specialist Technology Product. The goal is to bring these products to commercialisation and achieve the revenue thresholds required for commercial companies.

Pro Forma Financial Information and Working Capital Sufficiency

The amendments introduce detailed requirements for the disclosure of pro forma financial information and statements of working capital sufficiency, in the context of SPAC transactions. SPACs are now required to include pro forma financial information in their listing documents. This information must cover:

1. Pro Forma Adjustments that reflect the impact of the SPAC’s initial listing, including the accounting implications of any shares or other financial instruments that have been or will be issued. These adjustments must be detailed enough to illustrate the financial impact on the net tangible assets or liabilities of the SPAC.
2. The pro forma information should provide a clear picture of how the initial listing and subsequent financial transactions affect the SPAC’s balance sheet, helping investors assess the financial health and risk profile of the company.

SPACs are also required to make a clear statement regarding their working capital sufficiency. This information must cover:

1. A declaration that the SPAC has sufficient working capital to cover its operational needs up to the point of the De-SPAC transaction. This statement must be supported by the directors’ view on the sufficiency of working capital and be concurred with by the sponsor.
2. For the purpose of this requirement, any funds from the initial offering that are subject to redemption or are earmarked for the De-SPAC transaction are, therefore, excluded from the working capital calculation. Only funds available for day-to-day operations are considered when assessing the SPAC’s financial viability.

Prospectus and Disclosure Requirements:

SPACs and Successor Companies must comply with the prospectus requirements as outlined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO). The Exchange views a De-SPAC transaction as equivalent to a public offering, thus requiring full compliance with the prospectus disclosure standards. Therefore the listing document issued during the De-SPAC transaction must meet all the disclosure obligations required for an initial public offering (IPO). Key elements that must be disclosed include:

1. The identities of Independent Third-Party investors, the amounts they have committed, and the principal terms of their investments must be disclosed in the De-SPAC Announcement.
2. The disclosure must include the negotiated value of the De-SPAC target and the basis upon which this value was determined.
3. The board must provide an opinion confirming that the “fair market value” requirement has been satisfied, along with the basis for this opinion, in a form acceptable to the Exchange.
4. Any earn-out rights, which are provisions that allow sellers to earn additional compensation based on the future performance of the Successor Company, must be disclosed with their material terms clearly outlined.
5. The SPAC or the Successor Company must confirm that all applicable open market requirements are met.

Forward Purchase Agreements and Participation by SPAC Promoters

Forward Purchase Agreements:

SPACs may enter into forward purchase agreements with SPAC Promoters or other institutional investors prior to the initial listing of the SPAC. Under these agreements the purchaser commits to subscribe, and the SPAC commits to issue equity in connection with the De-SPAC transaction at a specified amount. The agreement may also include an option for the purchaser to subscribe for additional equity up to a specified amount, which is exercisable at the discretion of the purchaser.

Participation by SPAC Promoters:

SPAC Promoters are allowed to participate in the initial offering of SPAC shares and the financing of a De-SPAC transaction, but only under specific conditions. They must meet the definition of a Professional Investor, comply with all applicable open market requirements, including rules regarding the distribution of shares to ensure sufficient public float. The price and terms of the subscription by the SPAC Promoter must be same as those available to other investors who are participating in the transaction at the same time. Their participation must increase their “capital at risk,” aligning their interests with those of ordinary shareholders. This alignment of interests ensure that the Promoters are incentivised to act in the best interests of all shareholders. The participation of SPAC Promoters in these transactions must be disclosed in the listing document to ensure full transparency to the market.

As SPAC Promoters are considered connected persons under the Listing Rules, any forward purchase agreement or loan arrangement involving SPAC Promoters is treated as a connected transaction and such transactions must comply with all applicable connected transaction requirements, including the need for independent shareholders’ approval where

Loans Granted by SPAC Promoters to SPACs

The amendments regarding loans granted by SPAC Promoters to SPACs, focuses on the conditions under which these loans can be extended, particularly when such loans may be settled through the issuance of securities. The amended guidelines differentiate between two types of loan settlement terms:

1. Loans permitting settlement by issuing SPAC securities at the discretion of the SPAC or promoter are prohibited under the updated rules. This prohibition prevents SPAC Promoters from avoiding the risks associated with the failure of a De-SPAC transaction. Typically, these risks would be borne by the beneficial owners of SPAC securities, and allowing promoters to convert loans into equity could lead to conflicts of interest and unfair advantages.
2. If a loan must be settled by issuing securities without any discretion from the SPAC or the Promoter, the settlement terms must comply with all relevant requirements under the Listing Rules. This includes restrictions on the terms and issue price of the securities. The securities issued as a result of such settlement will be included in the relevant dilution cap, so that the issuance does not disproportionately dilute existing shareholders’ interests.

Since SPAC Promoters are considered connected persons, loans granted by SPAC Promoters to SPACs are subject to the connected transaction requirements under Chapter 14A of the Listing Rules. The treatment of these loans depends on the settlement method:

1. If the loan will not be settled by the issuance of SPAC securities, it is fully exempt from connected transaction requirements provided that the financial assistance is conducted on normal commercial terms or better and is not secured by the SPAC’s assets.
2. Loans that are settled through the issuance of SPAC securities are subject to full compliance with the connected transaction requirements, including obtaining independent shareholders’ approval where necessary. The SPAC must also consider other Listing Rules implications, including those under Chapters 13 and 15, related to the issuance of such securities.

Additional Connected Transaction Requirements for De-SPAC Transactions

The amendments also introduce requirements for handling connected transactions during the De-SPAC process, to protect minority shareholders and maintain the integrity of the transaction. A De-SPAC transaction may be classified as a connected transaction under Chapter 14A of the Listing Rules if it involves any of the following scenarios:

1. If the transaction involves entities or individuals who are considered connected persons to the SPAC, such as major shareholders, directors, or other related parties, it is classified as the connected transaction requirements.
2. Beyond the standard connected transaction rules, if a De-SPAC transaction is classified as a connected transaction, it must also comply with the additional requirements specified in Main Board Rule 18B.56, including enhanced disclosure obligations and the necessity of obtaining independent shareholders’ approval.

In certain circumstances, the Exchange may consider waiving some of these additional requirements:

1. If a De-SPAC transaction is classified as a connected transaction solely because of Rule 14A.28 (which relates to a transaction with a party that becomes a connected person post-transaction), the Exchange might grant a waiver. However, this waiver is conditional. To qualify, all shareholders of the De-SPAC target must not be connected persons of the SPAC and must be independent of the SPAC and its connected persons.
2. If a substantial shareholder of the De-SPAC target, by virtue of the transaction, becomes a controller or an associate of a controller of the Successor Company, the Exchange may still consider a waiver because in some cases, transactions involving major shareholders might not present the same level of conflict of interest as those involving direct connections to the SPAC.

Regardless of any waivers granted, the SPAC is required to appoint an independent financial adviser (IFA) when a De-SPAC transaction constitutes a connected transaction. The IFA’s role is to provide recommendations to the independent board committee and shareholders regarding the fairness and reasonableness of the transaction.

The additional requirements under Rule 18B.56 are also applicable to any De-SPAC transaction that may confer benefits on connected persons through their interests in the entities involved in the transaction to ensure that any potential for undue advantage or preferential treatment is rigorously scrutinised and mitigated.

Effective from 1 September 2024, these amendments introduce updated investment requirements, revised independence criteria for third-party investors, and enhanced disclosure obligations for SPAC Promoters and temporary modifications to the market capitalisation thresholds for Specialist Technology Companies.