22 December, 2017
Earlier this year, the Stock Exchange of Hong Kong (the “Stock Exchange”) published a consultation paper on The Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules1 (the "Consultation Paper") seeking public feedback on proposals relating to the reform of the Growth Enterprise Market (“GEM”) and related changes to the Listing Rules. After reviewing 100 responses from professional bodies, market practitioners, issuers and other entities and individuals, the Stock Exchange published conclusions to the Consultation Paper on 15 December 2017 and adopted substantially all of the proposed changes.
The new measures are aimed at improving the overall quality of GEM issuers and addressing market concerns on shareholding concentration and share price volatility of GEM securities while maintaining GEM’s attractiveness for small to mid-sized companies. Some of the key changes in respect of GEM listings include increasing the cashflow requirement to HK$30 million and minimum market capitalisation requirement to HK$150 million, extending the post-IPO lock-up period on controlling shareholders to two years, introducing a mandatory public offering of at least 10% of the total offer size and removing the streamlined process for GEM issuers to transfer to the Main Board. The minimum market capitalisation requirement for Main Board applicants has also been increased to HK$500 million. The names “Growth Enterprise Market” and "創業板" will be transformed to “GEM” to better reflect the new role of GEM as a market for small and mid-sized companies.
The amendments will become effective on 15 February 2018 (“Rule Amendment Date”) and apply to all applications received by the Stock Exchange on or after such date (with the exception of certain GEM transfer applications as discussed below). Listing applications which are received prior to the Rule Amendment Date will be processed under the existing GEM or Main Board Listing Rules (as applicable), with one renewal of such application permitted.
Streamlined process for GEM transfers
One of the main proposals in the Consultation Paper was to reform GEM by re-positioning it as a stand-alone board by removing the GEM streamlined process, under which GEM issuers, provided the Main Board eligibility requirements are met, can transfer to the Main Board without having to appoint a sponsor or issue a listing document. While this process was originally intended to provide a channel for smaller companies that had grown and developed in size and maturity to list more easily on the Main Board, the Stock Exchange questioned its effectiveness in light of the decreasing number of GEM transfer cases relative to eligible GEM issuers under the scheme. Furthermore, there is a concern for companies of poorer quality being able to list on the Main Board more easily via this route. Upon removal of the streamlined process, GEM transfer applicants will be required to appoint a sponsor to conduct due diligence and publish a “prospectus standard” listing document. However, the Stock Exchange will allow exemptions for GEM transfer applicants in relation to certain documentary and post-IPO lock-up requirements, restrictions on fund raising and the appointment of a compliance adviser.
GEM transfer applications which are submitted before the Rule Amendment Date and have not lapsed, been rejected or returned as at that date will continue to be processed under the current streamlined process and the current Main Board rules for listing eligibility. They are permitted to have one renewal of such applications thereafter. For “Eligible Issuers”, meaning those GEM issuers or GEM applicants who have submitted a GEM listing application on or before 16 June 2017, there will be a three-year transitional period for their applications to be assessed under the current rules, subject to the following requirements: (i) applicants which have changed their principal businesses and/or controlling shareholders will be required to appoint a sponsor and publish a listing document; and (ii) applicants which did not change their principal businesses and/or controlling shareholders will need to prepare an announcement regarding the GEM transfer and appoint a sponsor for due diligence in respect of their activities during the most recent full financial year and up to the date of the announcement.
Financial Requirements
The financial requirements for GEM listings will be raised under the new rules with a view to improving the quality of issuers and addressing market concerns on the liquidity and lack of open market in the securities of GEM issuers. Under the new market capitalisation requirements, a GEM applicant will be expected to have a minimum market capitalisation of HK$150 million (up from the current HK$100 million), and a minimum public float value of its securities of HK$45 million (up from the current HK$30 million). The minimum cashflow requirement for GEM applicants will also be lifted from HK$20 million to HK$30 million.
In respect of the Main Board, there will be an increase in the minimum market capitalisation expected of applicants from HK$200 million to HK $500 million and a corresponding increase in the minimum public float value of companies from HK$50 million to HK$125 million. As noted in the conclusions, the increased amounts are necessary in order to preserve the distinctiveness of the Main Board and its position for larger companies.
Lock-Up
Amendments to the rules will also be made in relation to a controlling shareholder’s lock-up period after a GEM listing.
The existing restriction on disposing equity interests within six months of listing will be extended to one year. Likewise, the subsequent lock-up period for controlling shareholders to dispose of any interest which would result in them no longer being a controlling shareholder will be increased to one year once the new rules come into force. This has been widely supported by respondents to the Consultation Paper which have indicated that the measures will help control the listing of potential shell companies.
The proposal to extend the lock-up period for Main Board listings was not adopted as shell activities are seen as more prevalent on GEM compared with those on the Main Board.
Public Offering and Placing
Further, in an effort to reduce share price manipulation in GEM stocks, the Stock Exchange will introduce a mandatory public offering mechanism of at least 10% of the total offer size for all GEM listings. The GEM rules in relation to placings to core connected persons, connected clients and existing shareholders and their respective associates will also be aligned with the Main Board rules in that a waiver or consent from the Stock Exchange will be required.
Going forward
We believe that the Stock Exchange will likely continue to vet applications with the strictest scrutiny and monitor issuers closely for their reasons for listing, uses of listing proceeds and any potential market manipulation activities. Despite the new rules taking place, where the Stock Exchange casts a doubt on an applicant’s ability to fulfil the suitability and open market requirements, questions may still be raised thereby resulting in the proposed listing project being adversely affected. We should still bear this in mind when preparing for the listing projects going forward.
1 Published on 16 June 2017.
Norman Hui, Partner, Eversheds Sutherland
normanhui@eversheds-sutherland.com
