A dangerous road to travel

Editorial | Mary Ma 5 May 2021

It's often said that one man's meat is another man's poison.

Thus, if the sudden popularity of Special Purpose Acquisition Companies - or SPACs as they are more commonly known - is Wall Street bankers' meat, could the same be Hong Kong investors' poison?

Obviously, this is not necessarily the case with Financial Secretary Paul Chan Mo-po. Otherwise, he would not have asked the local bourse operator and securities regulator to look into the possibility of creating a local SPAC regime.

Maybe Chan wishes to create a honey pot. This could be a risky thought. Policymakers should stop and think twice before venturing further down this road of, at best, uncertainty, at worst, danger.

Excessive quantitative easing following pandemic-related economic stimuli by governments has contributed to a spectacular boom in SPACs in the United States, where their number is reported to have risen fast.

In 2020, a total of 248 SPACs were created, raising a total of US$83 billion ((HK$645 billion). In 2019, only 59 were launched, with US$13.6 billion raised.

What makes eyes pop and jaws drop is how last year's record has been readily shattered this year. More than 300 SPACs have been launched and over US$100 billion raised since the start of 2021.

There's a sense of sarcasm here because SPACs are shells with no actual business. It's sarcastic that, while shell companies have become the target of crackdowns of late, their mutants are accepted with open arms.

Some like to call these shell variants blank-check companies that are usually formed by private equity firms, high-profile investors or billionaires.

They raise funds in the public market purely as a shell with a stated purpose to acquire and merge an operating business later on.

Investors do not know what business they will buy when subscribing the shells. All they have is a kind of trust in the founders, which is strange.

The SPAC boom in New York is a bubble fueled by QE liquidity that has to park somewhere while betting on the prospect of making high returns.

Hong Kong tycoon Li Ka-shing may have been smart with his bet on Zoom when the tech firm was still a startup. But the problem is that there are so many startups around - and only a few of these will grow large and tall.

If a SPAC places the bet on a wrong target, it will be the end of the story.

Another risk is that there are only a handful of startups worth serious investment. Needless to say, these companies are in demand and a SPAC will have to offer them higher valuations in order to beat competitors, which could result in overpaying what they are actually worth.

In the US, a SPAC is given only two years to acquire and merge an operating business. Failing to do so requires it to dissolve and return what is left to shareholders.

Hong Kong is still in the preliminary stage of studying the feasibility. It is only right for the Securities and Futures Commission to voice caution as it is asked to express its views.

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