SPAC Special study part 5: Hong Kong Market rules VS Canadian Market rules

Introduction

According to public data, the prototype of SPAC originated from the CPC program ("Capital Pool Company", capital pool company) launched by the Toronto Stock Exchange of Canada ("TSX") in 1987, which was mainly used to acquire mining companies. Later, it was introduced into the domestic securities market by GKN Securities of the United States, and registered the trademark of "SPAC". Although the Canadian CPC program has been established on many exchanges for many years, the fact that (SPAC), a special purpose acquisition company, is really valued and widely used only happens in the US capital market. Many exchanges implemented the SPAC listing rules in December 2008, allowing special purpose acquisition companies to trade publicly. It was not until April 2015 that the first real SPAC company appeared in Canada. Multiple exchanges describe SPAC as enabling potential SPAC investors to participate in these mergers and acquisitions of (private operating companies), a private-equity firm that has traditionally focused only on private equity funds. While the description of SPAC is attractive, Canada's SPAC market has been lukewarm compared to the popularity of SPAC in the US capital markets. What is the main content of the SPAC rules of the multi-exchange, and what is the difference between the new SPAC listing rules issued by the Hong Kong Stock Exchange and the Hong Kong Stock Exchange? this article will make a brief interpretation by comparing the SPAC listing rules of the two places. For a detailed introduction of the SPAC mechanism and the interpretation of the Hong Kong SPAC rules, please refer to our previous article: "one of the special studies on SPAC: the past and present lives of SPAC" and "the second special study of SPAC: interpretation of the listing mechanism of Hong Kong SPAC". For the comparison of Hong Kong SPAC rules with American SPAC rules and Singapore SPAC rules, please refer to "SPAC Special study III: Hong Kong Market rules VS American Market rules" and "SPAC Special study IV: Hong Kong Market rules VS Singapore Market rules".

Comparison of SPAC listing rules between Stock Exchange and Multi-Exchange

We will continue to sort out and compare the main contents of the SPAC rules of the Stock Exchange and SGX in the context of the life cycle of SPAC for reference.

1 the establishment stage of SPAC

1.1 SPAC sponsor qualification

(1) Stock Exchange

SPAC sponsors must meet the eligibility and eligibility requirements. At least one SPAC sponsor of SPAC must hold a category 6 (advising on institutional financing) and / or category 9 (provision of asset management) licence issued by the Hong Kong Securities and Futures Commission and hold at least 10 per cent of the sponsors' shares.

(2) multiple exchanges

Multi-exchanges have no rigid licensing requirements for SPAC sponsors, but SPAC sponsors need to have rich business experience and listed company experience. When evaluating the suitability of SPAC for listing, the stock exchange will take into account the experience and past performance of the founding shareholders and directors of SPAC.

1.2 Investor qualification

(1) Stock Exchange Before the completion of the SPAC M & A transaction, only professional investors (i.e. institutional professional investors and individual professional investors) subscribe for and buy and sell SPAC securities. After the merger and acquisition of SPAC, the sale and purchase of shares in the successor company is not subject to such restrictions. SPAC shall each distribute SPAC shares and SPAC warrants to at least 75 professional investors, including 20 institutional professional investors, and institutional professional investors must hold at least 75 per cent of the outstanding SPAC shares.

(2) multiple exchanges

There are no restrictions similar to those of the Stock Exchange to allow retail investors to participate.

2 SPAC listing stage

The Stock Exchange

Multi-exchange

SPAC fund-raising scale

The total amount raised in the IPO is not less than 1 billion Hong Kong dollars (about US $128 million).

The initial public offering must raise not less than C $30 million (approximately US $150 million).

Minimum number of public shareholdings

At least 75 professional investors, of whom at least 20 must be institutional investors and must hold at least 75% of the securities.

At least 150 public shareholders shall collectively hold at least 1 million shares with a total market capitalization of at least C $30 million.

Issue price of SPAC shares

The issue price of each SPAC share is not less than HK $10.

Not less than $2 per share or unit.

Transaction arrangement

SPAC must apply for the listing of SPAC shares and SPAC warrants, which are bought and sold separately from the date of initial listing.

There are no rules.

Minimum investment of sponsors

At least one sponsor is a No. 6 or No. 9 license company and holds at least 10% of the sponsors' shares.

SPAC sponsors must hold between 10 and 20 per cent of SPAC shares.

Dilution upper limit

The upper limit of the total number of shares of the sponsors: the shares of the sponsors shall be capped at 20% of the total number of shares issued by SPAC at the time of IPO. After the initial merger and acquisition of SPAC, HKEx may consider allowing a further issue of up to 10 per cent of the sponsors' shares (that is, the commission portion) if a series of requirements are met, including that the successor meets the set performance targets. As a result, the total number of sponsors' shares is limited to 30 per cent of SPAC's issued shares at the time of the initial public offering.

Dilution limit of warrants: if the SPAC warrants are fully exercised, the number of SPAC shares issued as a result of the exercise shall not exceed 50 per cent of the number of shares issued at the time of exercise (including the shares of the sponsors of SPAC).

The upper limit of the total number of shares of the sponsors: the shares of the sponsors shall not exceed 20% of the issued shares of the SPAC at the end of the IPO.

No dilution limit for warrants has been set for SPAC sponsors.

Merger and acquisition time limit

SPAC must find a suitable M & A target and complete the M & A transaction within 36 months. Under special circumstances, it may apply to the shareholders' meeting and the Stock Exchange for an extension of up to 6 months.

SPAC must complete the business merger within 36 months from the date of listing.

The proportion of funds raised by IPO to be placed in escrow / trust accounts

100%

At least 90%, these funds must include 50% underwriter commission.

Debt financing

There are no rules.

Allow SPAC to obtain unsecured loans from others, including SPAC founders, on reasonable commercial terms, up to a maximum of 10% of SPAC escrow funds, the limit of which will be disclosed in the SPAC IPO prospectus.

Such loans do not provide any recourse against SPAC's escrow funds and must be repaid in cash prior to the completion of SPAC qualified mergers and acquisitions.

3 SPAC M & A transaction stage

3.1 SPAC merger and acquisition standards and other requirements

The Stock Exchange

Multi-exchange

SPAC audit standards for M & A transactions

The successor company surviving after the initial merger of SPAC is required to comply with all the new listing requirements (including the minimum market capitalization requirement and the financial eligibility test) under the listing rules of the Stock Exchange.

The successor company formed as a result of the SPAC M & A transaction must comply with the original listing requirements of TSX.

SPAC must also prepare and submit an "unissued" prospectus describing SPAC and the proposed SPAC M & A business to the applicable securities regulator in Canada. The above SPAC prospectus must be approved by the securities regulator before the information can be mailed to SPAC shareholders to seek SPAC shareholder approval for the SPAC merger and acquisition business.

Approval of SPAC M & A transactions

The merger and acquisition transaction of SPAC shall be confirmed by the approval of SPAC shareholders at the general meeting of shareholders, and the holding of the general meeting of shareholders shall not be replaced by the written approval of shareholders.

SPAC sponsors and their close contacts must waive their voting rights.

The SPAC M & A transaction is subject to the following approval of the majority of the directors of: (a) who are not involved in the M & A transaction and the majority of votes cast by (b) SPAC shareholders at the general meeting.

If a qualified M & A transaction consists of more than one M & A, each M & A must be approved.

In addition, if 100% of the proceeds from the initial public offering are deposited in an escrow account, there is no need to seek shareholder approval.

Financial adviser / IPO sponsor

The successor company must appoint at least one sponsor to assist it in its application for listing and conduct due diligence review by the sponsor. SPAC must formally appoint an IPO sponsor no later than two months before the listing application date. After putting forward the proposal for the initial merger and acquisition of SPAC, SPAC will have to submit an application for listing.

The SPAC sponsor shall, on behalf of SPAC, appoint the necessary team of consultants as soon as possible to assist the IPO process and set goals and deadlines.

The Nature of SPAC M & A Target

Investment companies (as defined in Chapter 21 of the listing rules) shall not be the targets of SPAC mergers and acquisitions, and there are no restrictions on other types of companies, provided that such companies comply with their applicable new listing requirements.

There are no special rules.

The scale of SPAC M & A targets

The fair market value of SPAC's merger targets must be up to 80 per cent of the money raised by SPAC's initial public offering.

The fair market value of the SPAC merger target must be at least 80 per cent of the money held by the trust.

Lock-up period

Within 12 months from the date of completion of the special purpose M & A transaction, the promoters of SPAC shall not sell any securities of the inherited company beneficially owned by them as shown in the listing documents.

Within the first six months after the listing of the successor company, the controlling shareholder shall not sell its shares, and during the second six-month period, it shall not sell its shares so as to affect its holding position.

There are no rules.

Inherit the company's open market

When a successor company goes public, it must ensure that there are at least 100 professional investors.

There must be at least 150 public shareholders.

3.2 Independent third-party (PIPE) investment

(1) Stock Exchange

The terms of the M & A transaction must include investment from the third-party investor (PIPE), and all PIPE investors must be professional investors.

The minimum amount of capital raised by an independent third-party investor shall vary according to the agreed valuation of the M & A target, accounting for at least 7.5% of the agreed valuation of the target company, as follows:

SPAC M & A target

Agreed valuation

Independent third party investment

Minimum percentage of agreed valuation

Less than HK $2 billion

25%

HK $2 billion or above but less than HK $5 billion

15%

HK $5 billion or above but less than HK $7 billion

10%

HK $7 billion or above

7.5%

Source: Hong Kong Stock Exchange "Consulting Summary-Special purpose acquisition companies"

At least 50 per cent of the independent PIPE investment must come from at least three institutional investors, each with a total asset management value of at least HK $8 billion.

(2) multiple exchanges

There is no mandatory requirement for independent PIPE investment.

3.3 shareholder redemption

(1) shareholders of the Stock Exchange shall have a right of redemption on voting in respect of:

The existence of (a) after a major change in the initiator of SPAC;

(b) SPAC M & A transactions; or

(c) 's proposal to extend the duration of SPAC M & A transactions.

According to the regulations of the Stock Exchange, share redemption is not linked to the vote on SPAC M & A transactions, and shareholders who reject SPAC M & A transactions are not the only shareholders who can enjoy share redemption rights.

In terms of the time of redemption, shareholders may choose whether or not to exercise the right of redemption within the period from the date of the notice of the general meeting convened to approve the above matters to the end of the date and starting time of the general meeting.

In terms of the number of exercises, SPAC shall not set a limit on the number of SPAC shares that can be redeemed by SPAC shareholders.

(2) multiple exchanges

If the SPAC M & A transaction can be completed within the specified time, the shareholder who voted against the M & A transaction (except the SPAC promoters) shall have the redemption right exercised on the basis of his share of the cash held in the escrow account, the redemption price shall not be less than the total amount in the: (a) escrow account (less any applicable taxes and direct fees related to the exercise of the redemption right) divided by; The total number of shares in circulation of (b) at that time (except the shares of the sponsors).

In terms of redemption time, shareholders shall exercise their redemption rights within 30 natural days after the completion of the merger and acquisition of SPAC. If the redemption rights are not exercised within the specified time, these rights will be cancelled.

In terms of the number of redemptions, SPAC may set a limit on the maximum number of shares that shareholders can exercise their redemption rights, provided that the limit: (a) shall not be less than 15% of the shares sold at the time of SPAC IPO; (b) is disclosed in the IPO prospectus.

Conclusion

From the above analysis, we can see that many exchanges have higher requirements for SPAC fund-raising scale, public shareholding and supervision, coupled with the influence of many other factors, such as the relaxation of the traditional IPO road in the Canadian capital market in recent years, so the demand for SPAC in the Canadian market is not very strong. In contrast, the Hong Kong Stock Exchange draws lessons from the experience of the US capital market and introduces special regulatory requirements in the light of the development of the local market, which requires higher requirements for investors, sponsors, independent PIPE investment and other aspects, and is more conducive to the sound development of Hong Kong's capital market. We hope that the introduction of the SPAC mechanism by the SEHK will attract more high-quality listing resources, boost market investment confidence and further enhance the competitiveness of Hong Kong's capital market.

Reference materials:

1. Toronto Stock Exchange: guide to Special purpose acquisition companies

two。 Hong Kong Stock Exchange: "Consulting Summary-acquisition of companies for Special purpose"