23 February 2022
Offshore SPACs: Will Asia be next to witness the boom?
Special purpose acquisition companies (SPACs) were all the rage in the US in 2020 and early 2021. Following amendments to the SPAC listing regime in Hong Kong and with the Singapore market abuzz with a series of upcoming listings, will Asia be the next to experience the SPAC boom first hand? Here, Singapore managing partner Anthony McKenzie and Hong Kong managing partner Michael Padarin discuss.
What impact have the amendments for SPAC listing rules in Hong Kong had on perceptions of the market?
Michael Padarin (MP): Hong Kong operates in a hyper-competitive marketplace, with competition for listings from exchanges in the PRC, regional exchanges such as Singapore and also the major US exchanges.
The recent revisions to the Hong Kong Main Board Listing Rules introducing the SPAC regime is an incredibly positive step forward in addressing the competitive disadvantage Hong Kong faced in attracting SPAC sponsors to the market, particularly from the dominant US exchanges.
The new Hong Kong SPAC listing regime seeks a balance, introducing relatively stringent requirements for the quality of both listing candidates and also de-SPAC targets, addressing the commercial needs of SPAC sponsors whilst also raising the bar in terms of investor protections.
Although some commentators have noted that the quality and suitability requirements set out in the new regime are too high and will detract from the commercial attractiveness of the regime, SPAC promotors in the PRC and Kong have largely welcomed the development and see it as increasing the attractiveness and accessibility of Hong Kong as a listing venue.
Singapore is also gearing up to listings – what does this mean for businesses and legal work there?
Anthony McKenzie (AM): Last September the Singapore Exchange announced rules that would allow SPACs to list on the bourse's main board. The first three SPACs made their debuts on the SGX last month, notably with each using a Cayman exempted company as the issuer vehicle. These listings mark the first major launch of SPACs in Asia, represent a much-needed revival for the SGX (which has struggled to compete with the Hong Kong and US exchanges for high-profile tech IPOs) and should help SGX shake off its reputation as an exchange dominated by real estate investment trusts and investors searching for yield rather than growth.
SPAC listings have been touted as a more streamlined alternative to traditional IPOs and were all the rage on US exchanges in 2020 and early 2021 until the market cooled and regulators began to apply more scrutiny. Singapore is keen to follow in the footsteps of the US, and its SPAC listing initiative comes amid a boom in tech investment in Southeast Asia, which is home to over 650 million people and fast-growing economies such as Indonesia, the Philippines and Vietnam.
Such regional economic growth and the introduction of Singapore's SPAC framework will no doubt be accompanied by an increased demand for deals and legal services here. As the Singapore market prepares for more SPAC activity, both SPACs and target companies will also look to engage various other service providers in order to address finance, accounting, regulatory and compliance issues at each stage of the SPAC life cycle.
How has the Asia market reacted to these developments?
AM: Singapore has plans to position itself as a major Asian hub for SPACs, and is offering a regulatory SPAC framework similar to that in the US, allowing participation of retail investors but with additional safeguards including a minimum subscription level from sponsors. In the US a business consummation or de-SPAC transaction must take place within 24 months of the SPAC's IPO. In Singapore SPACs similarly have 24 months to consummate a de-SPAC transaction, but have the ability to request a 12 month extension if they meet certain requirements.
It is anticipated that several Singaporean and regional APAC companies in high-growth, high-tech sectors will be mature for listing on public markets in the coming years. These companies will provide attractive business combination targets for SPACs. As a first mover in Asia on the SPAC front, Singapore hopes to draw the attention of sponsors and investors looking for new opportunities in the region. However, Singapore is not expecting a rush of SPAC listings like in the US market - instead, it wants to see SPACs steadily being used as a new conduit for high-quality listed companies on SGX over time.
What kind of work do SPACs generate for offshore firms?
MP: Cayman Islands companies continue to be favoured by sponsors and investors when considering a SPAC transaction, particularly where the target company is based outside of the US. Cayman Islands companies listed in the US can take advantage of the 'foreign private issuer' rules and exemptions making Cayman companies attractive at the IPO stage; the Cayman Islands also has a very flexible and well tested merger regime which is commonly utilised to effect the ultimate business combination or de-SPAC transaction.
As of June 2021, there were 289 Cayman Islands companies listed on NASDAQ and 185 Cayman Islands companies listed on the New York Stock Exchange. By end of 2020, there were 1,186 Cayman Islands companies listed on the Hong Kong Stock Exchange, which accounted for 60.36% of the aggregate number of listed companies on the Hong Kong Stock Exchange.
As it is now common for the listing vehicle and also the de-SPAC target to be structured as Cayman Islands companies, we are being instructed as Cayman Islands counsel at both the SPAC IPO stage, and also the de-SPAC stage, in each case alongside onshore counsel. Following the de-SPAC transaction there is also an ongoing role as company offshore legal counsel.
With the implementation of the Hong Kong SPACs regime, we are optimistic that the demand for Cayman vehicles will continue to grow.
What type of work is taking up the bulk of your time at present?
AM: China's recent crackdown on tech and data-heavy companies and the US SEC's increased scrutiny on SPAC transactions to protect investors have (for now) simmered interest in SPAC listings and traditional IPOs of offshore companies on US exchanges. However, we are actively working with clients exploring both SGX and HKEx SPAC listings, with a number of these expected to come to market early this year.
Asia also continues to be the source of other significant offshore deal flows for us, ranging from fund managers launching offshore funds, to joint ventures, preference share financings and large global M&A transactions (including de-SPAC transactions). Cayman and BVI structures in particular continue to have a central role in these deal flows, having already become embedded in various Asian structures, and Asian sponsors and investors remain responsive to innovative products introduced by these offshore jurisdictions.
Is there anything else worth knowing about the current SPAC landscape?
MP: Hong Kong has been accused of being too late to the party as the SPAC market has developed and exploded in the US over the past two years. The introduction of the Hong Kong SPAC listing regime however, provides a welcome new option for both SPAC promotors and investment targets, looking to access local capital sources.
AM: It will be interesting to see if the new SPAC regime injects momentum into the SGX. Although SPACs have lost some lustre in the US, both Singapore and Hong Kong have the wisdom of hindsight after observing the SPAC development in the US and are each betting that their respective SPAC listing frameworks will boost their allure to global investors and regional start-ups. It remains to be seen which Asian exchange will become the region's go-to for SPACs and whether Asia will indeed be the next to see a SPAC boom. What is certain is that Cayman and other offshore jurisdictions such as BVI, Bermuda, Jersey and Guernsey will continue to remain central to global capital and M&A markets as more Asia-based SPACs are launched and large numbers of existing cashed-up SPACs race to identify merger targets.