Updated: Jan 18, 2022
SPAC specific due diligence requirements have been clarified by the Stock Exchange of Hong Kong and the Singapore Stock Exchange. This I-OnAsia Update highlights the many similarities between the diligence requirements for both exchanges, at the SPAC IPO and De-SPAC stages. From an operational and reputational risks diligence perspective, both jurisdictions set reasonably high pre-transactional vetting requirements.
These diligence requirements are intended to reduce risks to investors. In this context, firms that get their due diligence right can achieve a competitive advantage, with lower costs of capital and better risk taking during acquisitions. For more insights on I-OnAsia's Recent Representative Matters in Asia-linked SPACs and De-SPACs, click here.
HKEX & SGX Chasing SPAC Deals
Despite dating back to the early 1990s, special purpose acquisition companies (“SPACs”) engaging in initial public offerings (“IPOs”) have recently yielded a plethora of commentary in academic circles and among investment banks, accountants and lawyers. SPACs raised approximately USD160 billion in 2021, representing approximately 28% of total funds raised in 2021 IPOs is evidence of the importance of this capital raising event. (Global non-SPAC IPOs raised USD402 billion in 2021.)
This phenomenon is likely to continue growing in 2022, including in Hong Kong and Singapore.
Competition between Hong Kong and Singapore has a long history and runs the gamut from cuisine, safety, livability, logistics, education, local talent, etc. The desire to compete for SPACs to list on local exchanges is no different as some commentators favor Hong Kong, while others tip the scales for Singapore.
Different Diligence Perspectives?
I-OnAsia is a background screening and due diligence specialist, with a 20+ year track record performing pre-transaction screening in both Hong Kong and Singapore. Each jurisdiction offers pros and cons, even in relation to SPACs, but the due diligence requirements that are being imposed on SPACs by The Stock Exchange of Hong Kong (the “HKEX”)  and the Singapore Exchange (the “SGX”)  have more similarities than differences.
We highlight below some key areas of importance to professionals advising SPACs as well as the directors and officers of the same. We have focused on SPAC IPO and De-SPAC Transaction issues for the HKEX and the SGX.
SPAC Lifecycle 101
Experienced SPAC professionals understand the SPAC lifecycle as including three stages, involving:
· SPAC IPO
· De-SPAC Transaction
Disclosure events at both the SPAC IPO and De-SPAC stages demand enhanced due diligence efforts to avoid material misstatements or omissions in disclosure documents.
It is worthwhile noting the distinctive character of SPACs, e.g. lack of operating history, yields relatively less due diligence at the SPAC IPO stage when compared to a traditional IPO. However, general due diligence issues include, but are not limited to, potential conflicts of interest and sponsors’ compensation as well as similar matters related to the target at the De-SPAC Transaction stage. Regardless of the stage, accountants, lawyers, sponsors, officers, directors, and financial advisors, among others, are obligated to conduct reasonable due diligence. Delisting, if the SPAC fails to identify and complete a De-SPAC Transaction, creates additional due diligence challenges beyond the scope of this article.
General HKEX Due Diligence Requirements
The HKEX engaged in an extensive public consultation from September to October 31, 2021 culminating in a Consultation Paper: Special Purpose Acquisition Companies (the “HKEX Consultation Paper”). The purpose of the HKEX Consultation Paper was to solicit “…market feedback on proposals to amend the Listing Rules to create a listing regime for SPACs in Hong Kong.”
The HKEX imposes details of due diligence requirements in its Practice Note 21. Due Diligence by Sponsors in Respect of Initial Listing Applications. Equally, the HKEX has outlined Amendments to Main Board Listing Rules in relation to SPACs.
General SGX Due Diligence Requirements
The SGX engaged in an equally extensive public consultation in 2021 culminating in a Consultation Paper: Proposed Listing Framework for Special Purpose Acquisition Companies (the “SGX Consultation Paper”). The purpose of the SGX Consultation Paper was to solicit “…feedback, views and suggestions from the public on SGX’s proposal to introduce a primary listing framework for Special Purpose Acquisition Companies in Singapore…”
The SGX imposes details of due diligence requirements by having “… regard to the due diligence guidelines issued by The Association of Banks in Singapore. Equally, the SGX has outlined Amendments to Main Board Rules in relation to SPACs.
Common Denominators HKEX vs. SGX SPAC Due Diligence Requirements
The SPAC specific due diligence requirements for the HKEX and SGX are similar. Below, we highlight several areas of interest.
SPAC IPO STAGE
Vetting the SPAC, e.g. regulatory, financial, legal, accounting, etc.
Potential conflicts of interest of sponsors, directors, officers, and others.
Compensation, particularly that on contingency terms, of sponsors, directors, officers, and others and
Competing interests of sponsors, directors, officers and others vis-à-vis the public shareholders.
Risk of loss to sponsors, directors, and officers upon failure to complete De-SPAC Transaction.
Additional services provided by sponsors, e.g. financial advisory, placement agent, debt financing, etc.
Vetting of professional and institutional investors for SPAC shares and SPAC warrants, if applicable.
Vetting of SPAC promoters and directors to ensure compliance with licensing requirements, if applicable.
Compliance with anti-money laundering regulations related to the SPAC.
DE-SPAC TRANSACTION STAGE
Ensuring De-SPAC target (“DST”) meets all due diligence requirements.
Environmental, Social, Governance (“ESG”) compliance of DST.
Compliance with anti-money laundering regulations related to the DST.
Disclosure of methodologies for search for and evaluation of DST, including conflicts of interests of sponsors, directors and officers.
Disclosure and evidencing of arms-length negotiations with DST.
Disclosure and evidencing of DST’s valuation, including comparable targets and fairness to shareholders.
Acquisition and evidencing of all financial, legal, regulatory, accounting, and other matters of DST.
Disclosure and evidencing of how the sponsors, directors, and officers will benefit from the transaction
The SPAC sensation in 2021 is a harbinger for an even more compelling 2022. Although the focus is always on meeting listing requirements and raising capital, among others, we would be remiss not to caution practitioners to pay close attention to the enhanced due diligence peculiar to SPACs.
After all, Benjamin Franklin’s wise words are instructive: “An ounce of prevention is worth a pound of cure” By getting the diligence process right, risks are reduced for shareholders in the business. This lowers the cost of capital and can yield other competitive advantages, including better risk-taking during De-SPAC acquisitions.
For more insights on I-OnAsia's Recent Representative Matters in Asia-linked SPACs and De-SPACs, click here.
 For the purposes of this article, due diligence is the process of using expected efforts, relevant to the situation, to investigate the material aspects of a proposed transaction so that a reasonable regulator, sponsor or potential investor in a securities offering can make an informed decision.  Early Bird Capital, https://www.earlybirdcapital.com/about/principals, “EarlyBirdCapital is a boutique investment bank, as well as the pioneer and leader in the Special Purpose Acquisition Company ("SPAC™") investment vehicle.” 2022. See also Excelsior Capital, https://www.excelsiorgp.com/resources/what-is-a-spac-and-why-are-they-suddenly-so-popular/, “SPACs were created by David Nussbaum in 1993, a time when blank check companies were prohibited in the US.”, 2022.  Investopedia, https://www.investopedia.com/terms/s/spac.asp. “A special purpose acquisition company (SPAC) is a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company.” See also Hong Kong Exchanges and Clearing Limited, https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/September-2021-Special-Purpose-Acquisition-Co/Conclusions-(Dec-2021)/cp202109cc.pdf?la=en “…an issuer with, or seeking, a listing that has no operating business and is established for the sole purpose of conducting a transaction in respect of an acquisition of, or a business combination with, a target, within a pre-defined time period, to achieve the listing of the target.” Allen & Overy, SPACs listings in Hong Kong – a comparison among different jurisdictions, https://www.allenovery.com/en-gb/global/news-and-insights/publications/spacs-listings-in-hong-kong-a-comparison-among-different-jurisdictions. “A SPAC is a shell company without prior operating history and revenue-generating business. It raises funds through an IPO process which will be used to combine with a target operating company, typically referred to as a ‘de-SPAC’ transaction. If a de-SPAC is successful, the target company will then achieve public listing. If a de-SPAC is not successful prior to the prescribed deadline, the SPAC has to be liquidated and funds raised have to be returned to investors”. USA Securities and Exchange Commission, https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-investor-bulletin#:~:text=%E2%80%9CSPAC%E2%80%9D%20stands%20for%20special%20purpose,to%20as%20blank%20check%20companies.&text=Unlike%20an%20operating%20company%20that,company%20when%20it%20becomes%20public, “SPAC acquires or merges with a private company, occur after, often many months or more than a year after, the SPAC has completed its own IPO. Unlike an operating company that becomes public through a traditional IPO, however, a SPAC is a shell company when it becomes public. This means that it does not have an underlying operating business and does not have assets other than cash and limited investments, including the proceeds from the IPO.”  See, among others, Harvard Business Review, SPACs: What You Need to Know, https://hbr.org/2021/07/spacs-what-you-need-to-know, July 2021. University of Oxford Faculty of Law, The UK SPAC Reform: Preliminary Remarks, https://www.law.ox.ac.uk/business-law-blog/blog/2021/09/uk-spac-reform-preliminary-remarks, September 6, 2021. INSEAD Knowledge, Reverse Mergers Went Bust. Will SPACs Follow?, https://knowledge.insead.edu/economics-finance/reverse-mergers-went-bust-will-spacs-follow-16246?p=....., March 15, 2021. Wharton School of Business, Why SPACs Are Booming, https://knowledge.wharton.upenn.edu/article/why-spacs-are-booming/, May 4, 2021. Hong Kong University Business School, Sponsors’ Networks Take Centre Stage in SPAC Success, https://www.hkubs.hku.hk/media/press-release/sponsors-networks-take-centre-stage-in-spac-success/, July 20, 2021. National University of Singapore, The curious case of SPACs, https://www.aidf.nus.edu.sg/wp-content/uploads/2021/01/Issue-967-SPACs.pdf, 2021.  See, among others, J.P. Morgan, What Is a SPAC?, https://www.jpmorgan.com/solutions/cib/investment-banking/spac-here-to-stay-2021, March 12, 2021. Goldman Sachs, Permanent Capital Strategies, https://www.gsam.com/content/gsam/us/en/pcs/homepage.html, 2022. Morgan Stanley, SPACs, an IPO Alternative, Explained. https://www.morganstanley.com/ideas/spacs-IPO-alternative, 2022. UBS, SPACs in 2021: Boom, bust, and recovery, https://www.ubs.com/us/en/wealth-management/insights/market-news/article.1554390.html?caasID=CAAS-ActivityStream, December 20, 2021.  See, among others, KPMG SPAC Intel Hub, SPACs: A hot topic for investors, acquirers and sellers, https://advisory.kpmg.us/insights/spac-intel-hub.html 2022. PricewaterhouseCoopers, How special purpose acquisition companies (SPACs) work, https://www.pwc.com/us/en/services/trust-solutions/accounting-advisory/spac-merger.html, 2022. Deloitte Touche Tohmatsu Limited, A primer on SPACs, https://www2.deloitte.com/us/en/pages/audit/articles/spac-risks-trends.html, 2022. Ernst & Young LLP, Why SPAC success requires a deeper look into target companies’ readiness, https://www.ey.com/en_us/ipo/spac-target-company-readiness, August 11, 2021.  See, among others, Loeb & Loeb LLP, SPACs, https://www.loeb.com/en/services/practices/corporate-finance/capital-markets/spacs?section=overview, 2022. Davis Polk & Wardwell LLP, Hong Kong introduces new listing regime for SPACs, ttps://www.davispolk.com/insights/client-update/hong-kong-introduces-new-listing-regime-spacs, December 23, 2021. Skadden, Arps, Slate, Meagher & Flom LLP, Skadden Discusses “The Year of the SPAC”, https://www.skadden.com/insights/publications/2021/02/skadden-discusses-the-year-of-the-spac, February 18, 2021. Latham & Watkins, SPACs, https://www.lw.com/practices/SPAC, 2022. Cravath, Swaine & Moore LLP, Transition SPAC’s Initial Public Offering of Units, https://www.cravath.com/news/transition-spacs-initial-public-offering-of-units.html, June 22, 2021. Mayer Brown LLP, Hong Kong Stock Exchange Implements New SPAC Rules from 1 January 2022, https://www.mayerbrown.com/en/perspectives-events/publications/2021/12/hong-kong-stock-exchange-implements-new-spac-rules-from-1-january-2022, December 23, 2021. Allen & Overy LLP, SPACs listings in Hong Kong – a comparison among different jurisdictions, https://www.allenovery.com/en-gb/global/news-and-insights/publications/spacs-listings-in-hong-kong-a-comparison-among-different-jurisdictions, December 20, 2021. Dentons, The SPAC landscape in the context of family offices, https://www.dentons.com/en/about-dentons/news-events-and-awards/events/2021/may/12/the-spac-landscape-in-the-context-of-family-offices, May 12, 2021. Kirkland & Ellis, Hong Kong SPAC Listing Framework to Launch in 2022, https://www.kirkland.com/publications/kirklandpen/2021/12/hong-kong-spac-listing-framework, December 20, 2021. King & Wood Mallesons, The Dawn of the SGX SPAC, https://www.kwm.com/us/en/insights/latest-thinking/dawn-of-sgx-spac.html, September 3, 2021.  The Street Inc., Top 5 SPACs of 2021, https://www.thestreet.com/markets/ipos/top-5-spacs-of-2021, December 30, 2021. See also Allen & Overy, SPACs listings in Hong Kong – a comparison among different jurisdictions, https://www.allenovery.com/en-gb/global/news-and-insights/publications/spacs-listings-in-hong-kong-a-comparison-among-different-jurisdictions, “There has been a substantial growth in the popularity of SPACs in 2021, and by mid-December there were already 603 SPAC IPOs raising USD160.9bn.” December 20, 2021.  Reuters, Analysis: Record IPO binge in 2021 leaves investors hung over, https://www.reuters.com/markets/europe/record-ipo-binge-2021-leaves-investors-hung-over-2021-12-24/, December 25, 2021.  Insider, Inc. What's Next For SPACs In 2022? Experts Share Stocks To Watch, https://markets.businessinsider.com/news/stocks/exclusive-what-s-next-for-spacs-in-2022-experts-share-stocks-to-watch-1031089141, January 9, 2022.  Culture Trip, Hong Kong v Singapore – Which City Does it Better?, https://theculturetrip.com/asia/china/hong-kong/articles/hong-kong-vs-singapore-which-city-does-it-better/, 2022.  S&P Global Market Intelligence, Hong Kong could be more competitive in SPAC listings after tweaking rules, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/hong-kong-could-be-more-competitive-in-spac-listings-after-tweaking-rules-68139565, December 20, 2021.  Nikkei Asia, Singapore poised to beat rival Hong Kong in listing first SPACs, https://asia.nikkei.com/Business/Markets/IPO/Singapore-poised-to-beat-rival-Hong-Kong-in-listing-first-SPACs, January 13, 2022.  https://www.hkex.com.hk/?sc_lang=en  https://www.sgx.com/  These lists are not exhaustive as each SPAC will involve due diligence requirements peculiar to its industry, business, management, etc.  “De-SPAC Transaction” refers to the subsequent business combination (typically a merger) between the SPAC and a target company.  We also have focused exclusively on Main Board Listings of equity securities  https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/September-2021-Special-Purpose-Acquisition-Co/Consultation-Paper/cp202109.pdf, September 2021. Rules were effective January 1, 2022.  Ibid, clause 1, page 1.  HKEX, https://en-rules.hkex.com.hk/sites/default/files/net_file_store/HKEX4476_3740_VER10.pdf  HKEX, https://en-rules.hkex.com.hk/sites/default/files/net_file_store/Update_136_Attachment.pdf  https://api2.sgx.com/sites/default/files/202103/Consultation%20Paper%20on%20Proposed%20Listing%20Framework%20for%20Special%20Purpose%20Acquisition%20Companies.pdf, March 31, 2021. Rules were effective September 3, 2021.  Ibid, clause 1.1, page 1.  SGX, http://rulebook.sgx.com/rulebook/112b.  The Association of Banks in Singapore, ABS Listings Due Diligence Guidelines, https://api2.sgx.com/sites/default/files/2020-11/ABS%20Listings%20Due%20Diligence%20Guidelines_0.pdf, November 13, 2020.  SGX, Consultation Paper Proposed Listing Framework for Special Purpose Acquisition Companies, Appendices 2 and 3. https://api2.sgx.com/sites/default/files/2021-03/Consultation%20Paper%20on%20Proposed%20Listing%20Framework%20for%20Special%20Purpose%20Acquisition%20Companies.pdf, March 31, 2021.  Benjamin Franklin, Philadelphia, 1736.