Hong Kong


President Xi Jinping announced the establishment of the Beijing Stock Exchange (BSE) on 2 September at the Global Trade in Services Summit of the China International Fair for Trade in Services. On 15 November, the BSE officially opened, and 81 enterprises were initially listed and publicly traded.

A comparison of capital markets regulations Zheng Chao
Zheng Chao
Partner at Merits & Tree in Beijing
Tel: +86 186 0056 5185

The official website of the China Securities Regulatory Commission (CSRC) stated that the official opening of the BSE was another landmark in the reform and development of China’s capital markets. The author believes that the establishment of the BSE is an important step in the construction and development of China’s multi-level capital markets, and makes up for the key link in the transition from China’s over-the-counter (OTC) market to the open market.

The BSE will interconnect with the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE), the National Equities Exchange and Quotations (NEEQ), and the regional equity market in the process of diversification, laying a solid foundation for the establishment and improvement of the transfer of the listing system against the background of registration reform, and bringing great potential to the development of regional equity trading markets.

Regional equity markets

The establishment of the NEEQ for small and medium-sized enterprises in January 2013 marked a key step in constructing China’s multi-level capital markets. In December 2013, the Third Plenary Session of the 18th Central Committee of the Chinese Communist Party proposed to improve the multi-level capital markets system in its decision on several major issues concerning comprehensive reform.

By the end of 2016, there were 40 regional equity markets in the country. These have played an active role in supporting diversified financing of micro, small and medium-sized enterprises, promoting the standardised operation of such enterprises and enhancing the inclusiveness of financial services. Regional equity markets have become the foundation of the multi-level capital markets system. However, these regional equity markets have their problems such as unclear legal status, unimplemented regulatory responsibilities, and unsound management systems, leading to financial risks.

In this context, the General Office of the State Council and the CSRC subsequently issued the Notice on Regulating the Development of Regional Equity Markets and the Provisional Measures for the Supervision and Administration of Regional Equity Markets in 2017, which reaffirms the overall principles for standardising the development of regional equity markets, clarifies their basic positions and makes regulatory adjustments. The above-mentioned documents also put forward basic measures to strengthen the management of regional equity market operators and, at the same time, put forward requirements for the construction of the accredited investor system and information systems in regional equity markets.

The promulgation of the above-mentioned notice and the Trial Measures for the Supervision and Administration of Regional Equity Markets (Securities Supervision Commission Order No.132) have played a positive role in standardising its development. Provincial units across the country have checked the regional equity markets within their jurisdiction under the requirements of the above two documents.

In July 2019, the CSRC announced an aggregate of 34 regional equity market operators in three groups that had been filed following the requirements of the above-mentioned two documents. The newly revised Securities Law, which came into force on 1 March 2020, establishes the legal status of the regional equity market in the form of basic legislation as “providing places and facilities for the offering and transfer of non-publicly offered securities”.

Capital markets outlook

The regional equity market is an important part of the multi-level capital markets system. The opening of the BSE not only opens up a channel for non-listed public companies to switch from an over-the-counter market to an open market, but also creates a new window for enterprises of different sizes to switch from a regional equity market to a national equity market.

It also shows a “three-step approach” to a large number of micro, small and medium-sized enterprises that do not satisfy the requirements in the NEEQ, or even the open market, i.e. to list in the regional equity trading market first, then switch to the national equity transfer market, and then transfer from the national equity transfer market to different sectors in the three major stock exchanges.

Such an advanced path of access to capital markets is conducive to the development of micro, small and medium-sized enterprises in accordance with the normal laws of their own and the relevant industry in which they operate, and helps the enterprises to reduce the motive to whitewash or falsify their performance to meet the listing conditions in the short term. At the same time, it helps investors control investment risks while reducing the difficulty of supervision so that private equity investment institutions with long-term vision can support the sustainable development and steady growth of micro, small and medium-sized enterprises.

The continual emergence and growth of small and medium-sized micro-enterprises will also facilitate the development of regional equity markets and promote the construction of a multi-level capital markets system. To achieve these goals, it is necessary for the development of regional equity markets to continually refine their supervision quality and service level, increase the attraction of regional equity markets to local micro, small and medium-sized enterprises, and continually improve and refine the transfer of listing and delisting mechanisms between different markets and different sectors.

The regional equity market is currently positioned as a private equity market serving micro, small and medium-sized enterprises. A large number of these enterprises constitute the main force of China’s economic development. However, problems such as corporate financing difficulties, limited exit channels for investors and difficulty in obtaining investment and financing information have always been the main factors restricting their long-term and steady development.

The construction of a standardised, well-positioned scientific supervision, open information and transparent transactions in regional equity markets can largely solve the above-mentioned problems encountered in the development of micro, small and medium-sized enterprises related to investment and financing. To this end, local governments at the provincial level have invested a lot of resources in constructing regional equity markets in their respective localities, and the development pattern of regional equity markets with different characteristics has come into existence.

The regional equity market serves micro, small and medium-sized enterprises within the provincial administrative area. It is a comprehensive policy platform for local governments to support these enterprises. China’s economic development presents a pattern of imbalance between east and west and between north and south. There is a gap between the economically developed areas on the southeast coast and the old industrial base in northeast China, plus the economically underdeveloped areas in the west and the economically backward provinces in the central and western regions, regarding the total number of enterprises and listed companies.

The current situation of existing enterprises in these provinces also determines that they may not be able to stockpile enterprises that meet both quantity and quality standards for the capital markets in the short term. The regional equity market can become the cradle for these provinces to cultivate enterprises for capital markets.

The Notice on Regulating the Development of Regional Equity Markets clearly states that the provincial governments shall supervise these markets in their localities in accordance with regulations. Under the CSRC’s unified guidance, co-ordination and supervision, the provincial governments shall strengthen the formulation and implementation of supporting policies and measures for the micro, small and medium-sized enterprises, give full play to the cultivation role of their respective regional equity markets, promote the construction and sustainable development of enterprises within their jurisdictions, and continue to cultivate candidates for capital markets.


The development of China’s multi-level capital markets is a long-term and tough systematic project that requires patience. The establishment and operation of the BSE will undoubtedly accelerate this historical process. With such a big backdrop, the regional equity trading markets have a promising future.

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Special purpose acquisition companies (SPACs), as a viable listing alternative, have gained great popularity among large financial institutions and investors in the US over the past few years. The structure has attracted many Asian issuers to the US for fundraising. As one of the world’s most important financial markets, it is logical for Hong Kong to adopt a similar regime to attract financial institutions, investors and investment, and strengthen its position as Asia’s financial hub.

The Stock Exchange of Hong Kong (SEHK) has not attempted to merely replicate the US SPAC regime, but is establishing a regime tailored to the particular risks and requirements of Hong Kong capital markets. In particular, the SEHK has placed greater emphasis on having a high-quality regime with high-quality promoters and de-SPAC targets, aiming to create a regulatory system that can better protect the investors.

HK v US SPAC Regime

Sherlyn Lau
Partner and Deputy Head of China
Corporate and Finance Group at Sidley Austin
Tel: +852 2901 3804

Unlike the US SPAC regime, the SEHK intends to strike the right balance between delivering appropriate investor protections and market quality, and promoting market opportunity. This vision is to be achieved by imposing higher standards for SPAC offerings and de-SPAC transactions, and higher qualification requirements for SPAC promoters.

For example, the SEHK has imposed rigorous fundraising and distribution requirements, including minimum offering proceeds of HKD1 billion (USD128 million), distribution to at least 75 professional investors of which at least 20 must be “institutional” professional investors, and at least 75% of SPAC’s securities distributed to these institutional professional investors. Trading of SPAC securities will also be limited to “professionals only”. SPACs will be required to ring-fence 100% of SPAC offering proceeds and, on a redemption event, refund investors their pro-rata share of the full amount plus accrued interest, effectively creating an almost risk-free investment scenario for SPAC investors.

Raymond Oh
Partner and Deputy Head of China
Corporate and Finance Group at Sidley Austin
Tel: +852 2901 3825
+65 6230 3965

This 100% ring-fencing requirement means that the SPAC promoters have to bear all the expenses and costs related to the SPAC’s offering, and continuing operations before the de-SPAC transaction, with the exception that part of such expenses and costs can be settled with interests or other income earned on monies held in the escrow account. SPACs will also be required to offer investors redemption opportunities under several circumstances.

In addition, the SEHK has set stringent requirements on the suitability of SPAC promoters, including at least one SPAC promoter holding specific types of Securities and Futures Commission (SFC) licences, and owning at least 10% of SPAC promoter shares. Unlike the US SPAC regime, the SEHK has imposed a limit on SPAC promoter shares (no more than 20% of the total shares plus 10% earn-out upon the successor company meeting certain financial targets), and a dilution cap of 50% on all warrants (including SPAC warrants and promoter warrants). The 10% earn-out mechanism is unique for the Hong Kong market, which is aimed to incentivise the promoters to seek quality de-SPAC targets.

Generally, the US SPAC regime, which is less stringent than the Hong Kong SPAC regime, would allow the market players to have more flexibility to adopt innovative arrangements. For example, in the US SPAC market, the promoters may have the ability to extend the deadlines for completing a de-SPAC transaction several times, where underwriters may require promoters to deposit additional funds into the trust account for such extensions.

Differences between proposed HK regime and US regime

Key Requirements SEHK US Exchanges
Investor suitability Restricted to only professional investors Retail investors can participate in a SPAC IPO
Shareholder distribution A minimum of 75 professional investors of which 30 must be institutional professional investors A SPAC must distribute at least 75% of each of SPAC shares and SPAC warrants to institutional professional investors No such restriction. General NYSE/Nasdaq rules shall apply
Minimum issue price A minimum issue price of HKD10 (USD1.28) per share Nasdaq: Minimum bid of USD4 per share unless other requirements are met, then the minimum bid may be USD2 or USD3 per share. NYSE: Minimum bid of USD4 per share However, SPACs listed in the US typically have a unit issue price of USD10
Minimum market capitalisation HKD1 billion (USD128 million) General NYSE/Nasdaq rules shall apply. Nasdaq Global Market: USD75 million. Nasdaq Capital Market: USD50 million. NYSE: USD100 million
SPAC promoters At least one SPAC promoter, which is an SFC-licensed firm (with type 6 [advising on corporate finance] and/or type 9 [asset management] licences) shall hold at least 10% of the promoter shares No specific qualification or license requirement
Dilution cap Promoter shares: 20% of the total number of shares + additional 10% subject to successor company meeting certain financial targets Promoter warrants: (1) if exercised, 10% of the total number of shares; and (2) each warrant to purchase up to 1/3 ordinary shares No such cap. US SPAC promoters typically own 20% of the total number of shares
Requirement of successor company Must meet all new listing requirements Meet full initial listing requirements of Nasdaq and NYSE
Independent third-party investment Mandatory independent PIPE investment for completing a de-SPAC transaction No such requirement

Main hurdles in HK de-SPAC

Consistent with the SEHK’s intention to have a high-quality regime, the final Hong Kong SPAC rules impose higher standards on de-SPAC targets.

Meng Ding
Partner at Sidley Austin
Tel: +852 2509 7858

First, de-SPAC targets must have a fair market value equivalent to at least 80% of funds raised by the SPAC, which is a minimum of HKD800 million. Second, the SEHK will treat any de-SPAC transaction as a deemed new listing application where the successor company must meet all listing requirements. Third, private investment in public equity (PIPE) from institutional investors is required for any de-SPAC transaction.

The portion of the simultaneous PIPE transaction varies depending on the negotiated value of the de-SPAC targets, from 25% down to 7.5%. Lower portion may also be accepted by the SEHK on a case-by-case basis if the negotiated value exceeds HKD10 billion. In addition, the SEHK imposes certain requirements on the qualification and investment amount of the PIPE investors. The requirement for this substantial PIPE transaction may cause at least some timing uncertainty, pending SPAC promoters’ ability to search for capable PIPE investors at a suitable price. This PIPE investment requirement can protect public shareholders, as PIPE investors are generally experienced global financial institutions, which may have a collection of M&A tools to ensure the reasonableness and fairness of the de-SPAC target’s valuation.


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