China bans mainland brokers from promoting SPAC deals in Hong Kong – sources

China’s securities regulator has banned investment banks in the country it regulates from acting as promoters of blank check companies in Hong Kong, three people with knowledge of the matter said, cutting a potentially lucrative business.

The China Securities and Regulatory Commission (CSRC) decided to take the action, which was communicated to mainland investment banks earlier this year, due to concerns about the risks associated with such vehicles, it said. the sources.

Although deal promotion is banned, investment banks will be allowed to work as advisers on Special Purpose Acquisition Companies (SPAC) deals under Hong Kong’s new rules for such listings, it said. indicated the sources.

People spoke on condition of anonymity because the directive was not public.

The move comes as China prepares to unveil final and tougher rules for raising offshore capital by domestic firms, under which regulators are also seeking to subject investment banks to greater scrutiny.

Institutions affiliated with mainland China’s commercial banks, regulated by the China Banking and Insurance Regulatory Commission (CBIRC), have been given the green light to be promoters, the sources said, giving them a competitive edge.

Chinese brokerages have been lobbying the CSRC to change the rules to allow them to act as promoters as well, one of the sources said.

CSRC and CBIRC did not immediately respond to requests for comment.

SPACs are shell companies, or blank check companies, that raise funds in an initial public offering (IPO) with the proceeds held in a trust with the intent of merging with a private company and taking it public .

In Hong Kong, promoters are the same as sponsors in other markets in that they establish the SPAC and own promoter shares issued by the blank check company.

Promoters pay significantly less for their shares, which are a different class of shares than those issued at the IPO, compared to the price paid by public investors, allowing them to lock in higher profits later .

Investment banks are allowed to be sponsors in the United States, with some like Goldman Sachs having created their own SPACs in the past two years.

In Singapore, current rules do not prevent investment banks from becoming SPAC sponsors, but bankers say the regime requires such vehicles to be backed by experienced, quality sponsors and is unlikely to appeal to investment banks. investment and brokerage houses.

In Hong Kong, the asset management arms of two commercial banks, Agricultural Bank of China International (ABCI) and China Merchants Bank International (CMBI) acted as promoters of SPAC, according to documents filed by the stock Exchange.

The city authorized the establishment of SPAC from Jan. 1, and eight such vehicles have filed preliminary filings, according to the Hong Kong Stock Exchange’s website.