Every exchange should keep an eye on its rivals. In that spirit, the success of New York’s two bourses in allowing special-purpose acquisition companies to float is prompting Hong Kong to consider following suit. The problem is that it only recently triumphed in a long battle to rein in backdoor listings, which is what SPACs exist to enable. The benefits to the city of re-opening a years-long contentious debate are not clear.
Some $66 billion has been raised just this year, according to Dealogic, by SPACs now in search of companies to buy. Hong Kong is not alone in considering a slice of the action: London and Singapore, its regional arch-rival, are also mulling plans, while household-name tycoons such as Richard Li, son of Li Ka-shing, are working on launching their own U.S. blank-cheque companies.
In Hong Kong’s most recent battle against backdoor listings, scores of companies were going public but in time sold or minimised their main business in the expectation another would buy the shell to avoid an initial public offering. Thus a local nightclub operator could end up dwarfed by a mainland property management unit. A gold miner in 2016 sold its one excavation site claiming it felt it wasn’t diversified enough, sparking fears it intended to become a shell. That prompted funds giant BlackRock into a then-rare public rebuke. The city only triumphed in 2019 with new rules giving the exchange’s Listing Committee the power to force a company into a full IPO if the committee felt its mooted deal carried shell-like risks.
It is hard to see SPACs fitting into that process. Without a way of avoiding committee approval, they cannot offer the speedier route to market they tout in New York. Nor would they necessarily be cheaper than IPOs. Fees paid to underwriters in Hong Kong are about 2% of the total raised, at least half the amount usually charged by Wall Street bankers.
In New York, SPAC fever has brushed off any memories of the damage done by backdoor listings just over a decade ago when a series of mostly Chinese companies were found to be frauds after reversing into U.S. shell companies. Hong Kong’s experience is more recent still and local SPAC fans would do well to remember it.