22 December, 2017
In June 2017, the Stock Exchange launched a consultation paper on proposals to reform the Growth Enterprise Market (GEM). This was part of a broader review of Hong Kong’s listing regime, with a concept paper launched at the same time proposing the introduction of a new board (please see our 30 June 2017 briefing for further details on the consultation papers).
On 15 December 2017, the Stock Exchange issued its consultation conclusions on both the GEM consultation paper and the concept paper. We will update you on the concept paper conclusions in a separate bulletin. In this bulletin we focus on the GEM consultation conclusions and the amendments to the GEM regime. Substantially all of the proposals in the consultation paper are being taken forward which will result in GEM no longer being positioned as a stepping stone to a Main Board listing. Rather, GEM will operate as a standalone market for small and mid-sized companies seeking listing. There will also be changes to the Main Board to position it as a premium market for larger companies.
KEY AMENDMENTS TO GEM
Removal of streamlined process for transferring to Main Board
The existing streamlined process for GEM listed companies to migrate to the Main Board will be removed. Under the amended regime, a GEM-listed company seeking to switch to the Main Board will need to appoint a sponsor and produce a listing document meeting the prospectus standard. The sponsor will need to be appointed at least two months prior to the Main Board listing application being filed (consistent with the current regime for sponsors appointed for new listings on both the Main Board and GEM).
However, the qualification requirements for a GEM-listed company meeting the Main Board listing criteria to be able to transfer to the Main Board will remain unchanged. Currently a GEM-listed company must have published one full financial year of financial statements and not have been subject to any disciplinary investigation by the Stock Exchange or any serious or potentially serious breach of the Listing Rules during the previous twelve months. The consultation paper proposed enhancing the requirement by extending these time periods to two full financial years and 24 months respectively. However, this change has not been adopted.
Changes to the listing criteria for GEM companies
The consultation conclusions adopt the recommendations in the consultation paper as regards listing criteria as follows:
Track record requirement – this will remain at two years as currently.
Cash flow requirement – this will be increased to at least HK$30 million in operating cash over the two financial years prior to the issue of the listing document (compared to the existing requirement of at least HK$20 million).
Market capitalisation requirement – the minimum market capitalisation requirement will be increased to HK$150 million at the time of listing (compared to HK$100 million currently).
Public float on listing – with the increase in the market capitalisation requirement, the amount of public float required on listing will increase from HK$30 million to HK$45 million.
Controlling shareholder lock-up – controlling shareholders of GEM companies will be subject to a twelve month lock-up following listing, with a restriction in the subsequent twelve months on any disposals such that they cease to be a controlling shareholder. This extends the two lock up restricted periods from the existing six months periods.
The Stock Exchange is retaining its existing practice of not requiring a GEM listing applicant that can meet the Main Board listing criteria to list on the Main Board instead. This acknowledges that it is a commercial decision by the applicant as to the choice of board and, with the amendments to the GEM regime, regulatory arbitrage between the two boards will now be minimised.
Enhancements to the GEM listing process
The consultation conclusions also adopt the consultation paper recommendations to enhance the listing process with a view to ensuring an open market exists for GEM listings.
Public offering mechanism – Under the revised rules, a mandatory public offer of at least 10% of the total offer size will be required, with allocation between the public and placing tranches and claw back mechanisms equivalent to the existing Main Board regime under Practice Note 18 being introduced. Currently GEM listing applicants can decide the offering structure and whether to include a retail tranche, subject to disclosure in the listing document.
Placing guidelines – the Main Board restrictions on placings set out in the placing guidelines will apply to GEM listings.
Change of name
Given the re-positioning of GEM as a stand-alone board for small and mid-sized issuers, its name will be changed to “GEM” with corresponding changes being made to the GEM listing rules to reflect that it is no longer targeted at emerging companies.
KEY AMENDMENTS TO THE MAIN BOARD
To position the Main Board as a premium market for larger companies, the consultation conclusions adopt all of the consultation paper proposals to enhance the Main Board listing criteria except for the proposals to increase the post-IPO lock-up requirements applicable to controlling shareholders.
Profits test requirement – the profits test is to be retained as a criteria for determining eligibility for Main Board listed companies. The existing requirement for a profit of at least HK$20 million in the most recent financial year and an aggregate profit of at least HK$30 million in the two preceding years prior to the issue of the listing document is to be retained.
Market capitalisation requirement – the minimum market capitalisation requirement at the time of listing will be increased to HK$500 million (from HK$200 million currently).
Public float on listing – with the increase in the market capitalisation requirement, the amount of public float required on listing will increase from HK$50 million to HK$125 million.
Controlling shareholder lock-up – the existing lock-up requirements applicable to controlling shareholders of Main Board applicants are to remain unchanged and will not be extended in line with the increased periods to be applied for GEM applicants.
EFFECTIVE DATE AND TRANSITIONAL ARRANGEMENTS
The implementation date for these changes has been set as 15 February 2018. Given the tight time frame, there will be transitional measures to alleviate the impact of these rule amendments on existing GEM companies and companies in the process of applying for a listing.
Impact on Main Board listing applicants
Main Board listing applications submitted prior to 15 February 2018 will be processed under the existing Main Board listing rules.
Main Board listing applications submitted after that date will be processed according to the revised Main Board listing rules.
Impact on GEM listing applicants
GEM listing applications submitted prior to 15 February 2018 will be processed under the existing GEM listing rules.
GEM listing applications submitted after that date will be processed according to the revised GEM listing rules.
Impact on GEM to Main Board transfer applications
GEM companies who were listed on GEM on 16 June 2017 (being the date of the consultation paper) or who had submitted their GEM listing applications by that date and who become listed under that listing application (referred to as Eligible Issuers) can benefit from transitional arrangements to migrate their listing to the Main Board.
Where the GEM to Main Board transfer application is filed by an Eligible Issuer prior to 15 February 2018, the transfer application will be processed in accordance with the existing streamlined regime, applying the existing Main Board eligibility criteria.
Where the GEM to Main Board transfer application is filed by an Eligible Issuer within a transitional period of three years from 15 February 2018, eligibility will be assessed according to the existing Main Board requirements. However, the Eligible Issuer will need to appoint a sponsor to conduct due diligence on the most recent full financial year and publish a transfer announcement (complying with the content requirements set out in Appendix 28 to the amended Main Board listing rules). Where the Eligible Issuer has changed their principal business or controlling shareholder since listing on GEM, the Eligible Issuer will need to appoint a sponsor to conduct due diligence and publish a listing document.
Listing applications and GEM to Main Board transfer applications are permitted one renewal for the purposes of determining whether they fall within the transitional arrangements.
Role of sponsors in GEM to Main Board transfers with a transfer announcement
As noted above, sponsors will be required to conduct due diligence as part of the transfer process from GEM to Main Board under the transitional arrangements. For issuers publishing a transfer announcement, sponsors are expected to conduct due diligence on the prior full financial year and up to the date of publication of the transfer announcement to ensure that the information in that announcement is accurate, complete and not misleading. The normal sponsors’ due diligence standard under paragraph 17 of the Code of Conduct will apply and the sponsor will be expected to be closely involved in preparing the announcement. Given there is no listing document, the SFC has issued an FAQ to give further guidance to sponsors as to how paragraph 17 will apply in these circumstances.
CONCLUSION
These amendments are being implemented quickly. With the changes announced only two months prior to the implementation date of 15 February 2018, unless a listing application is underway with a sponsor already appointed, any new IPO deals about to kick off will effectively be subject to the new rules and listing criteria.
Companies looking to list in Hong Kong will need to ensure that they can meet the revised listing criteria under either GEM or the Main Board. Existing GEM-listed companies will need to digest the rule amendments and, for those wanting to migrate to the Main Board, ensure that this is implemented during the transitional period to benefit from the transitional arrangements.
For further information, please contact:
Matt Emsley, Partner, Herbert Smith Freehills
matt.emsley@hsf.com
