On September 17, 2021, the HKEx published the consultation document on the acquisition of companies for Special purpose (SPAC) on its website, which aroused widespread concern in the market.This article focuses on what SPAC is, the experience of international development, the similarities and differences between the SPAC mechanism introduced by HKEx and other markets, and the possible impact of SPAC mechanism on Hong Kong.

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What on earth is SPAC?

Basic situation: life cycle, sponsor, securities type, M & A model

SPAC (Special Purpose Acquisition Company), that is, a special purpose acquisition company, is a shell company whose purpose is to acquire a target company within a specified period of time after a public offering (IPO), so that the company can be listed indirectly.What makes SPAC special is that before the completion of the merger and acquisition, SPAC only holds cash and risk-free assets, and does not have any business or operating assets.

Life cycle: three stages: listing, finding goals and mergers and acquisitions

The life cycle of SPAC from listing to completion of M & A can be divided into three stages:

►Listing:The sponsor of SPAC is usually an experienced investor who injects a small amount of money to acquire a certain proportion of shares after the listing of SPAC (the US market is usually 20 per cent). As SPAC has no actual business, it only needs to meet the lower listing threshold of the exchange (such as the scale of the funds to be raised), and the listing process only takes 2-3 months. Before the public offering, SPAC is required to publish a prospectus, which generally includes information such as the ownership structure of SPAC after listing, the details of the issue (for example, with or without warrants), the background of the sponsors, the deadline for the completion of mergers and acquisitions (usually 24 months), and the characteristics of the companies the sponsors intend to acquire (such as industry, region, etc.).

The unit of shares issued by ► SPAC at the time of IPO usually consists of: 1) SPAC shares and 2) partial (usually 1) SPAC warrants (usually 1 or 1). The funds raised after the issue are deposited in a separate trust account.

►Looking for M & A targets:After IPO, SPAC sponsors began to look for suitable M & A targets and negotiate the transaction details with the management of the target company. M & An objectives must meet certain conditions (such as listing rules, scale, etc.). The sponsor of SPAC must find the target of M & A within the specified time, otherwise SPAC will be wound up. During this period, SPAC units are traded on the open market. Investors can also choose to split the SPAC unit into corresponding shares and warrants to trade separately.

► mergers and acquisitions (or De-SPAC):After determining the target of the merger and acquisition, SPAC will issue a transaction announcement, which will be approved by the general meeting of SPAC shareholders.

If ► is approved by shareholder vote, SPAC will merge with the company, and the SPAC of open market transactions will be replaced by the merger and acquisition target company (successor company). SPAC shareholders can not only choose to convert SPAC shares into common shares of the inheriting company, but also choose to redeem their SPAC shares from trust accounts and get a certain proportion of cash and interest.

If the ► merger is rejected at the shareholders' meeting, the SPAC sponsors need to re-find the merger target, or liquidate, and return the cash in the depositary account to the investor.

Figure 1: a 24-month SPAC lifecycle timeline diagram

Sponsor: the key to the success of SPAC

The sponsors of SPAC are generally professional managers with rich investment or industry experience. The ability of SPAC initiators is the key to the success of SPAC.The sponsors of SPAC need to find a suitable M & A target in a limited time after IPO and negotiate the details of M & A transactions with the management of the target company. After the completion of the merger and acquisition of SPAC, the sponsor may serve in the management of the successor company and provide resources for the successor company.Therefore, the sponsor is an important added value of SPAC.

What can the initiator get after establishing SPAC?The sponsors inject a small amount of money and acquire a certain proportion of SPAC shares (initiator shares) after the IPO. The sponsor shares generally have transaction restrictions before the M & A transaction, and the shareholders have no redemption after the vote, nor do they participate in the liquidation of SPAC. After the M & A transaction, the promoters' shares are converted into shares of the inherited company. The sponsor stock is a mechanism to encourage the sponsors to successfully complete the M & A transaction, which is also known as the "promoter reward".

Types of securities: units, stocks and warrants

SPAC securities are divided into three types: units, shares and warrants.SPAC is financed through the issuing unit. Taking the US market as a reference, the issue price of the SPAC is $10 per unit, and the SPAC unit consists of a SPAC share and a portion of the SPAC warrants (usually 1 / 2, 1 / 3, or other scores).The design with warrants can improve the attractiveness of SPAC issuance and at the same time compensate investors for the opportunity cost of holding SPAC shares during the target stage of M & A.SPAC units begin trading after IPO. 52 days after listing, investors who hold SPAC units can split the shares in the unit and warrants to trade separately. After the split, investors usually only get the full amount of warrants.

After the split, the shares of SPAC correspond to the ownership of SPAC assets, that is, shareholders can get the amount in the trust account in the event of SPAC failure.At the same time, SPAC shareholders can vote on mergers and acquisitions and choose to redeem shares. This structure ensures the income of investors to a certain extent. Even in the case of SPAC failure, investors' funds are protected by trust accounts.

On the other hand, the SPAC warrants allow the holder to purchase the shares of the inheriting company at the strike price when the stock price of the inheriting company reaches a certain level after the completion of the M & A transaction.The strike price of SPAC warrants in the US market is usually higher than the issue price (usually $11.50). The general term of SPAC warrants is 5 years. If SPAC fails to successfully complete the merger and acquisition or the share price of the successor company fails to reach $11.50 at the expiration of the warrants, the warrants will lose value.

Figure 2: schematic diagram of SPAC securities in the US market

M & A mode: allow shareholders to redeem and introduce third-party investors

When the SPAC sponsor completes the M & A negotiation with the target company, SPAC signs a letter of intent on the terms of the M & A transaction, which is subject to approval by the shareholders' meeting.When seeking shareholder approval, SPAC allows shareholders to redeem their shares. The US market does not require shareholders to vote in line with redemption options, resulting in high SPAC redemption rates in previous years. According to the Hong Kong stock exchange, SPAC shareholders redeem an average of 58 per cent of SPAC net worth, with a median redemption rate of 73 per cent. Therefore, for SPAC sponsors, the amount of money available for mergers and acquisitions after redemption is uncertain, and on average, the remaining capital is less than half of the amount raised by IPO.

In the face of this uncertainty, SPAC usually introduces independent third-party private equity investors, or PIPE (Private Investment in Public Equities), to assist in the completion of mergers and acquisitions.After the shareholder vote in the SPAC merger and acquisition transaction, SPAC faces the redemption of shares by some shareholders. While completing the merger and acquisition, SPAC issued additional issues to third-party investors to fill the gap in the funds needed for the M & A transaction. At the same time, the third-party investors can increase the confidence of the secondary market in the M & A target companies and determine the pricing.

Chart 3:SPAC schematic diagram of M & A transaction

Similarities and differences with traditional IPO: short time, high pricing, integration of resources, but dilutive equity

Why does SPAC exist? What is the difference from traditional IPO? With reference to overseas market experience, the company's listing through SPAC is different from traditional IPO in terms of time, pricing and other dimensions. Specifically:

► time: time to market via SPAC is faster than traditional IPO.From the experience of the US market, it takes only 3-5 months for a merger with SPAC to go public, while it usually takes 8 months or more for traditional IPO. This is because the merger of SPAC saves a lot of tedious procedures in IPO, such as preparing listing documents, roadshows and so on.

► pricing: the target company has higher and more definitive pricing.Pricing is determined when the target company completes the M & A transaction with SPAC, rather than through bookkeeping, so compared with traditional IPO, we can usually get more flexible and definite pricing through SPAC M & A, and pricing is relatively less affected by market fluctuations. With the increase in the listing scale of SPAC, the pricing advantage of SPAC may also be better reflected. In general, a target company may talk to several SPAC at the same time to get the best pricing. In addition, another reason why SPAC pricing is higher is that SPAC can disclose the profit forecast of the target company, while the traditional IPO can not publicly judge the future profit, so the company can get higher pricing with more aggressive profit forecast.

► sponsor: can provide high-quality resources.SPAC sponsors usually become a major shareholder of the successor company after a merger and acquisition (the sponsor owns 20 per cent of SPAC), and the continued investment of the sponsors in the succession company is also one of the reasons why SPAC is attractive. SPAC sponsors provide value-added services for successor companies in the dimensions of channel, financing, strategy and so on, while traditional IPO usually does not have this feature.

► equity dilution: dilution is a major implied cost of SPAC.There are two main sources of SPAC equity dilution: 1) the promoters' shares are diluted after dilution. Sponsors usually own 20 per cent of SPAC, but that 20 per cent does not have equivalent cash support (SPAC sponsors typically acquire sponsors' shares at a lower price). Therefore, after the M & A transaction, the shares of the sponsors dilute the rights and interests of other shareholders to a certain extent. The diluted ratio is also related to the scale of shareholder redemptions. When SPAC shareholders redeem more shares, the proportion of sponsors increases, resulting in an increase in dilution. 2) the execution of warrants (including initiator warrants and SPAC warrants) may dilute the shares of other shareholders.

The ► study found that the average share of SPAC that completed mergers and acquisitions in the United States from January 2019 to June 2020 was as high as 33%.[1], or after the merger and acquisition is completed, the average cash support of $10 per share of SPAC, taking into account dilution, is only $6.67.

Comparison between Chart 4:SPAC and traditional IPO

SPAC's Global Development experience

Course of development: led by the United States; has grown rapidly since 2019 and has been comparable to traditional IPO

SPAC has developed rapidly in recent years, and it is not a new concept in European and American markets.2005 years ago, SPAC was already trading in the OTC market over the counter in the United States. In 2008, SPAC officially launched on Nasdaq and the New York Stock Exchange. At present, in addition to the US market, markets such as Canada, Italy, South Korea and Singapore also allow SPAC to be listed. Since 2019, global SPAC market activity has increased significantly.

From the perspective of market distribution, the US market accounts for more than 90% of the global SPAC issuance scale.At present, SPAC is allowed to be listed in the United States, Europe, the United Kingdom, Canada, South Korea and Singapore. In terms of quantity and scale, the listing of SPAC in the US market is the most active. More than 90 per cent of the SPAC issued to date is in the US, and nearly 62 per cent of the SPAC is listed on Nasdaq. By comparison, SPAC issuance is relatively small in other markets, such as 2.2 per cent in Europe, 1.1 per cent in South Korea and 1 per cent in Canada.

Figure 5: global SPAC listing has risen sharply since 2019, but has fallen recently

Figure 6: the US market accounts for 95% of global SPAC issuance

The scale of SPAC issuance in the US market has increased sharply since 2020.The US market issued 248SPAC in 2020, more than quadrupling the number of 59 in 2019. The US SPAC raised $83 billion in 2020, about six times the amount raised in 2019.We conclude that there may be three reasons behind the recent increase in SPAC activity in the US market:1) under the background of COVID-19 epidemic and home isolation, the participation and activity of retail investors in the stock market increased significantly, which led to the demand for SPAC investment. 2) after the epidemic, US monetary policy was loosened sharply, and interest rates fell to historical lows, while SPAC securities not only have the possibility of high returns, but also have a certain income guarantee. 3) many investors with strong public influence (such as Chamath Palihapitiya and Peter Thiel) have recently launched SPAC, which has led to more widespread recognition and attention to the SPAC model.

In terms of quantity and fund-raising scale, the American market SPAC has been on a par with the traditional IPO market since 2020.According to SPAC Analytics statistics, the US SPAC IPO accounted for 55% of the total IPO in 2020, and the amount of financing accounted for 46% of the total amount of funds raised by IPO. At the beginning of this year, the American SPAC market continued this trend. Since the beginning of 2021, the number of SPAC listed on the market accounts for 63% of the total number of IPO, and the financing volume accounts for 51% of the total financing of IPO in the United States.

However, US SPAC financing has fallen sharply since the second quarter because of increased regulation.Since March, the United States has stepped up its supervision of SPAC at the regulatory level. In March, the US Securities Regulatory Commission (SEC) issued a notice reminding investors to guard against star-chasing behavior in the SPAC market. In April, SEC further said in a public statement that the financial forecasts disclosed by SPAC significantly overestimated the company's future performance. In May, Gensler, chairman of SEC, pointed out that SPAC has high diluted costs and risks at a hearing in the US House of Representatives, and asked SEC to make new rules to better protect the rights and interests of investors. In July, SEC filed a lawsuit against a sponsor of SPAC and the CEO of its successor company, alleging that financial information disclosed in its mergers and acquisitions misled investors. With increased regulation, the pace of SPAC listing in the US slowed in the second quarter, with only 62 SPAC listings, down 80 per cent from 298 in the first quarter. SPAC's share of US IPO fell from 75 per cent to 35 per cent in the second quarter.

Figure 7: SPAC IPO size in the US market fell after a sharp rise in the first quarter

Chart 8: the number of SPAC IPO in the United States accounted for more than half of the total IPO in 2020

Industry characteristics: mainly high-growth companies with small market capitalization

From the perspective of the successor companies that have completed mergers and acquisitions in the US market, we find that SPAC's M & A targets are mainly focused on small market capitalization companies in high-growth industries.

► in terms of industry distribution, sectors such as health care (19%), industry (17%), information technology (11%) and optional consumption (11%) are relatively high. Sectors such as essential consumption (2%), real estate (2%) and raw materials (3%) accounted for the lowest. In terms of industry segments, capital goods (14%), medical equipment and services (11%) and pharmaceuticals (11%) accounted for the highest proportion.

According to the market capitalization distribution of ►, the median market capitalization of companies after mergers and acquisitions in the United States is 1.76 billion US dollars, which is about 5 times the average fund-raising size of SPAC. The average size of SPAC inheritors is about the same as the median market capitalization of the S & P 600 small-cap index (about $160 million). Most SPAC successors have a market capitalization of less than $1 billion (32%), and the largest SPAC inheritors have a market capitalization of $24.5 billion.

Chart 9:SPAC target companies are mostly distributed in health care, industry, information technology and optional consumer sectors

Chart 10:SPAC target companies mostly have a small market capitalization, with a median of $1.76 billion

Post-IPO performance: stock price is stable, but there is liquidity discount

The stock price of SPAC is generally relatively stable after listing.This is because SPAC itself has no actual business and only holds cash. Since each share corresponds to the funds in the trust account, generally speaking, the fair value of SPAC is the net value of the trust account. In fact, the price of SPAC usually fluctuates around the corresponding net worth, such as in the US market, where most SPAC shares trade around $10.

However, because SPAC is less liquid than government bonds, most SPAC trade below net worth in the secondary market.Even if SPAC has a definite return on its investment (investors can redeem their shares and the amount in the trust account will be fully refunded after liquidation), the low liquidity causes SPAC to trade slightly below net worth. According to SPAC Tracker, more than 80 per cent of SPAC shares in the US market are below their offering price. If you think of SPAC simply as a zero-coupon bond, the current maturity yield of SPAC in the United States is as high as 2.02%, much higher than the 0.1% of one-year Treasuries.

The share price of SPAC is greatly influenced by public opinion and rumors.When the market learns the information of SPAC merger and acquisition plan, the market reaction is generally strong, and the market value of SPAC shares may significantly exceed their net worth.

Figure 11: the SPAC maturity yield on zero-coupon bonds is higher than that on U.S. Treasuries.

Chart 12:SPAC 's performance is generally relatively stable after listing

Post-M & A performance: overall outperforms traditional IPO, quality sponsors perform better

After the M & A transaction, the performance of SPAC succession company is generally mediocre.According to the Hong Kong Stock Exchange, the 49 SPAC that completed mergers and acquisitions in the US market between January 2019 and June 2020 earned only-2.9 per cent in the three months after the merger. The yield is significantly lower than the IPO index for the same period (13.1%). SPAC, which completed the merger in 2020, outperformed the S & P 500 by an average of nearly 27% in the six months after the deal. However, for the companies to be listed, the relatively lackluster performance of SPAC after M & A may mean that more reasonable pricing can be obtained through SPAC listing. The jump in the share price of traditional IPO on the day of its listing may mean that the offering price is on the low side.

The performance of M & An is quite different, and the performance of "high-quality sponsors" is better after M & A.SPAC launched by "quality sponsors" (defined by HKEx as investors with assets under management of more than HK $7.8 billion and executives of Fortune 500 companies) performed an average of 31.5 per cent in the three months after mergers and acquisitions, much higher than-38.8 per cent by other sponsors. Even 12 months after the merger, SPAC, a premium sponsor, performed as much as 50 per cent relative to other sponsors. It shows that the quality of sponsors is closely related to the performance of SPAC.

Figure 13: SPAC initiated by quality sponsors performs significantly better than other sponsors after mergers and acquisitions

Failure rate: historical liquidation rate is low, but focus on the current "supply exceeds demand" problem

SPAC liquidation refers to the situation in which SPAC sponsors passively dissolve SPAC and return account funds to investors because they fail to complete mergers and acquisitions within a specified period of time.In the US market, SPAC sponsors typically have 24 months to complete mergers and acquisitions.

Judging from previous years' experience, the liquidation rate of SPAC is only 12%.Of the 225 SPAC listed between 2009 and 2019, 194 have completed mergers and acquisitions (86 per cent), 3 have announced M & A targets (1 per cent), 3 are still looking for M & A targets (1 per cent), and 26 have been liquidated (12 per cent). This shows that in history, most SPAC completed mergers and acquisitions within a specified time, and the success rate of mergers and acquisitions is relatively high. The high success rate of SPAC is partly due to the redemption mechanism in the US market. SPAC investors can choose to redeem shares while approving M & A transactions, and the cost of shareholders' voting in favor is low, which makes it easier for SPAC M & A transactions to obtain shareholder support.

However, with the surge of global SPAC listing and the relatively limited number of target companies available for M & A, the future SPAC M & A market may reflect the characteristics of "supply exceeds demand", and the liquidation rate may rise in the future.At present, there are 469 SPAC in the US market looking for target companies, which is more than the SPAC that has completed mergers and acquisitions in US history. There are 313 SPAC still in the IPO process. With the increasing number of SPAC looking for M & A targets, but the number of companies suitable for M & An is very limited, the future SPAC market may face multiple SPAC pursuing a target company, and the competition between SPAC may continue to intensify. The failure rate may also rise.

Chart 14 the liquidation rate of SPAC listed in the United States in 2009-2019 is only 11%.

Figure 15: with the increasing number of SPAC looking for M & A targets, it may lead to the phenomenon of "supply exceeds demand"

Similarities and differences of SPAC in Hong Kong Market

The HKEx published the consultation document on Special purpose acquisitions ("consultation document") on its website on September 17, 2021, and put forward guiding proposals for the formal launch of the listing mechanism for special purpose acquisitions (SPAC), which has attracted wide attention from the market. Under the background of the sharp increase in the scale of global SPAC, how will the Hong Kong market distribute SPAC opportunities? We sort out why HKEx launched SPAC, the details of the "information document", and the differences in the SPAC system between Hong Kong and the US and Singapore markets.

Why launch SPAC? Enhance competitiveness and broaden the choice of listing

The consultation document points out that there are two main reasons for the establishment of the SPAC listing mechanism:

► broadens the way for listed companies to go public:According to the consultation document, many prospective companies consider listing through SPAC to be an attractive supplement to traditional IPO. As SPAC listing can shorten listing time, improve price certainty and flexibility of trading arrangements, the consultation document indicates that some market participants want to list in a "two-track" way, that is, on the one hand, they apply for listing through traditional IPO, on the other hand, they discuss with several SPAC sponsors about a combined listing through SPAC.

► increases the competitiveness of HKEx:According to the consultation document, Hong Kong, as an international financial centre, competes with the US market from the listing of companies in Greater China and Southeast Asia. So far, 12 companies from Greater China and Southeast Asia have been listed in the United States through SPAC. In addition, the United Kingdom has recently introduced the SPAC system in Singapore. The implementation of the SPAC listing mechanism on the HKEx will help enhance Hong Kong's competitiveness as an international financial center.

Chen Yiting, head of listing of HKEx, said at a media conference.SPAC is not expected to become mainstream, the launch of SPAC is not to replace the traditional way of public offering, but the two are complementary.

Hong Kong SPAC details: participants are limited to professional investors, M & A targets must comply with the new listing rules

The consultation document points out that the Hong Kong market not only wants to capture the opportunity of SPAC financing and listing, but also wants to find a mechanism suitable for the needs of local enterprises from the experience of SPAC in overseas markets. The Stock Exchange of Hong Kong has made a preliminary proposal on the SPAC system based on the experience of the United States, Singapore and other markets. We will briefly sort out the main contents of the proposal:

Before the merger and acquisition

► SPAC Securities Trading participants:HKEx proposes that before the completion of the SPAC merger and acquisition transaction, SPAC Securities (including units, shares and warrants)Professional investors onlyParticipate in subscription and transaction

The sponsor of ► requires:SPAC sponsors must have company management or investment management experience (to avoid the phenomenon of basketball stars serving as SPAC sponsors in the US market), and one of the sponsors must hold 1) category 6 or 9 licenses issued by the CSRC, and 2) more than 10% of the sponsors' shares

► raised funds and shareholder distribution:SPAC raised more than HK $1 billion, which is higher than the Nasdaq threshold of US $50 million. After listing, SPAC shares and warrants must be distributed to at least 75 professional investors, of whom at least 30 are professional institutional investors.

Upper limit of ► apportionment:In response to the problem of equity dilution, the HKEx proposes to set up an upper limit on the share of shares issued by warrants and the shares of sponsors.

Merger and acquisition transaction

► M & A transactions:SPAC M & A transactions need to be voted on by SPAC shareholders; SPAC shall issue a merger announcement within 24 months of listing and complete the M & A within 36 months.

► M & A target (inheriting company):The inheriting company must comply with all new listing requirements (including minimum market capitalization and financial testing), and the expected market value of the M & A target must reach more than 80% of the funds raised by IPO.

► third Party Investor (PIPE):The M & A target company must obtain independent third-party post-listing private investment (PIPE). The PIPE investor must hold at least 15-25% of the expected market value of the successor company, and at least one independent PIPE investor must be an asset management company or fund with an AUM of more than HK $1 billion.

► share redemption:Shareholders can only redeem shares in SPAC that they voted against the merger.

Delisting and liquidation

► delisting mechanism:When SPAC fails to publish a merger announcement or complete a merger transaction within the specified time, it will be delisted.

The difference with the United States and Singapore: more stringent conditions

The proposal of the consultation document is much stricter than that of the US market mechanism, and it puts forward a more stringent plan in the three stages of SPAC listing, finding M & A targets, and M & A transactions.This is partly because the HKEx has stepped up its crackdown on "cash shell companies", restricting shell companies from listing or circumventing listing rules through "backdoor listings". The establishment of a more stringent SPAC mechanism may, to some extent, distinguish SPAC from other "cash shell companies" and make the SPAC market more standardized.

► SPAC listing Pha

Scale of fund-raising:The consultation document proposes to raise SPAC to HK $1 billion, which is higher than the US $50 million (HK $388 million) on the Nasdaq capital market and S $150 million (HK $869 million) on the Singapore market.

The sponsor requires:HKEx intends to set higher requirements for the background of the sponsors of SPAC. For example, the consultation document states that SPAC sponsors must have senior experience in asset management or corporate management, and proposes higher criteria, such as 1) three years of experience in managing assets of more than HK $8 billion; or 2) holding management positions in large listed companies. In addition, one of the sponsors must hold 1) the sixth or ninth category license issued by the CSRC, and 2) more than 10% of the sponsors' shares.

In the US and Singapore markets, whether the sponsors have experience in asset management or corporate management is only part of the consideration of SPAC listing, and the market rules do not impose strict requirements on the work experience of the sponsors. For this reason, many sports and entertainment stars have participated in launching SPAC in the American market, and this phenomenon has also attracted the attention of American SEC.

Upper limit of apportionment:Equity dilution is one of the main risks of SPAC, and there are two main sources of dilution: 1) the shares of sponsors usually account for 20% of the total shares after SPAC IPO, and the proportion is even larger after shareholders' redemption; 2) warrants are included in the issuance of SPAC, and the execution of warrants will also dilute the shares of other shareholders. HKEx proposes to set a ceiling on the share book, requiring that the sponsors' shares should not exceed 20 per cent of all SPAC shares and that all warrants should not exceed 30 per cent of all SPAC shares if exercised immediately.

By contrast, there is no mandatory limit on the share of shares in the US market, while Singapore has a 20 per cent cap on promoters' shares and a 50 per cent limit on dilution of warrants. The dilution ceiling requirements in both markets are lower than those proposed in the consultation document.

► search target phase

Market participants:HKEx recommends that the trading of SPAC securities be limited to "professional investors", including professional institutional investors and professional individual investors, until the completion of the M & A transaction. Among them, professional individual investors include: 1) individuals with a portfolio of at least HK $8 million; 2) trust companies with assets of not less than HK $40 million; and 3) enterprises or partnerships with an investment portfolio of not less than HK $8 million and assets of not less than HK $40 million. The US and Singapore markets do not have such a rule, which allows retail investors to subscribe to and trade SPAC securities.

► SPAC merger and acquisition

Requirements for M & An objectives:HKEx's proposal requires SPAC to comply with all the new listing rules, including the latest market capitalization requirements and financial tests. In other words, companies that may be listed through SPAC can also choose to list with traditional IPO.

Both the US market and the Singapore market have similar requirements for the establishment and listing of M & A companies. However, companies in the US market only need to meet one of the many financial conditions that comply with the listing rules, and the threshold for companies to be listed is relatively low, while the threshold for listing in the Hong Kong stock market is relatively high.

Redemption:HKEx advises shareholders to redeem their shares in line with the vote, allowing only those who vote no to redeem their shares. The US and Singapore markets do not require shareholders to redeem in line with the vote.

Third-party investors:The consultation document requires that independent third investors (PIPE) be introduced at the same time in the M & A phase, and that the investment size of PIPE must be at least 15-25 per cent of the expected market capitalization of the successor company. By contrast, there is no mandatory requirement for SPAC to introduce PIPE investment in the United States and Singapore. But the Singapore market requires issuers to hire independent financial advisers without investing in PIPE to ensure reasonable pricing for mergers and acquisitions.

Chart 16: comparison of recommendations in the consultation document between the US market and the HKEx

Note: SPAC:Special Purpose Acquisition Company, special purpose acquisition company; PIPE:Private Investment in Public Equities, private investment public stock.

Source: Hong Kong Stock Exchange, NASDAQ, New York Stock Exchange, China International Capital Corporation Research Department

The potential influence and significance of introducing SPAC into HKEx

The proposals in the consultation document can only be confirmed after the views of market participants. However, with regard to the current proposal for the HKEx to introduce a SPAC mechanism, we think that it may have the following potential impact:

► 's introduction of SPAC listing and the reform of the listing system since 2018 have come down in a continuous line, prompting more new economy enterprises to list in Hong Kong.The HKEx has been optimizing its listing system since 2018 with the aim of transforming itself into a "new economy". The reform of the listing rules of the Hong Kong Stock Exchange in 2018 will allow companies with different power structures of the same shares and unprofitable biotechnology companies to list, and open secondary listing channels for overseas-listed issuers. Since the reform, the IPO scale of the Hong Kong market has risen significantly in the forefront of the world, and the proportion of the market capitalization of the "new economy" sector has increased year by year. In March this year, the HKEx further proposed to optimize and simplify the system for overseas issuers to list in Hong Kong, which is expected to further promote the return of overseas-listed new economy enterprises to the Hong Kong stock market. We believe that the introduction of the SPAC mechanism by the HKEx is a continuation of the listing reform in 2018 and is in line with the ongoing institutional reform of the HKEx.

The listing of ► SPAC and traditional IPO play a complementary role and are expected to promote more companies in the new economy to list in Hong Kong.According to the consultation document, some companies consulted by the HKEx expressed the hope of "dual-track" listing, that is, to apply for listing through traditional IPO on the one hand and to negotiate with several SPAC to list through mergers and acquisitions on the other, so as to obtain more flexible listing options. The consultation document also points out that biotechnology and WVR architecture companies can be listed through SPAC in the future. Based on previous experience, we believe that the introduction of the SPAC mechanism will increase the flexibility of New economy companies to list in Hong Kong, and is expected to further attract more high-quality new economy companies to list in Hong Kong.

► strengthens Hong Kong's position as a regional and global financial centre.Under the background of the fierce competition in the capital market, international financial centers, including Singapore, have established the listing mechanism of SPAC. Hong Kong is competing to become the first choice for listing companies in Greater China. At present, 25 SPAC with Greater China as the center have been listed on the US market, raising US $4.2 billion. At the same time, 12 companies from Greater China and Southeast Asia listed indirectly in the US market through merger with SPAC. For Hong Kong, the introduction of SPAC mechanism will not only add new financing channels for companies to be listed, but also enhance Hong Kong's competitiveness as a regional and global financial center.

► attracts more investors and becomes a bridgehead for investment in China's new economy and an offshore financial center for RMB.By introducing the SPAC system, HKEx is expected to attract managers and investors with experienced experience in Greater China to launch a SPAC in Hong Kong, thereby attracting more investors to invest in the Hong Kong stock market. Hong Kong will gradually become the bridgehead of China's new economic investment. The listing of more high-quality companies in Hong Kong will enhance its position as an offshore Chinese asset and RMB financial management center. The balance of renminbi deposits in Hong Kong rose steadily to 842.7 billion yuan in August, accounting for 6.81 per cent of total deposits in Hong Kong.

Chart 17: Hong Kong stock IPO fund-raising has increased significantly since 2018

Chart 18: HKEx's IPO financing is among the highest in the world since 2018.

Chart 19: the proportion of new economy companies in Hong Kong has increased significantly since the beginning of the year

Source: Wande Information, China International Capital Corporation Research Department, data as of September 28th

Chart 20: 12 companies from Greater China and Southeast Asia have listed on the US market through SPAC since 2018

Chart 21: continuous inflows of domestic and overseas funds into the Hong Kong stock market

Chart 22: RMB deposits in Hong Kong reached 842.7 billion yuan in August, accounting for 6.81% of total deposits in Hong Kong.