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4 January, 2018
With overwhelming market support, The Stock Exchange of Hong Kong Limited ("HKEx") has concluded that Hong Kong's listing regime must be expanded to remain competitive amidst a changing global capital environment.
On 15 December 2017, it announced the conclusions to the New Board Concept Paper, published on 16 June 2017. It also separately published the conclusions to the Consultation Paper on the Review of the Growth Enterprise Market ("GEM") and Changes to the GEM and Main Board Listing Rules.
Key takeaways from the conclusions to the New Board Concept Paper are as follows:
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Early stage companies |
Pre-profit / pre-revenue companies from the biotech sector to be permitted
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Companies with WVR structures |
Innovative and high growth companies with WVR structures to be allowed, subject to additional disclosures and safeguards
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Secondary listings |
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There will be two new chapters incorporated into the Main Board Listing Rules to allow (a) biotech issuers that are pre-profit/pre-revenue, and (b) innovative and high growth issuers that have WVR structures to list, subject to appropriate disclosures and safeguards. There will also be proposed modifications to the Listing Rules in relation to overseas companies to create the new secondary listing route.
The proposals will be further refined through discussions with stakeholders, to start immediately, with a consultation on the proposed Rule amendments to follow in Q1 of 2018.
GEM consultation conclusions and changes to GEM and Main Board Listing Rules
The HKEx has concluded that a clear distinction will be drawn between issuers listed on GEM and the Main Board. It will be implementing substantially all1 of the proposals in its consultation to (i) closer align the GEM and Main Board listing requirements, and (ii) transition GEM to be a standalone market for small and mid-sized companies instead of a stepping stone to the Main Board.
The following key changes will take effect on 15 February 2018 ("Effective Date"):
- The names "Growth Enterprise Market" and「創業板」will be changed to "GEM".
- Removal of the streamlined process for GEM transfers to the Main Board.
- Introduction of a mandatory sponsor requirement for transfer of listing from GEM to the Main Board, and a sponsor must be appointed at least two months before the submission of a listing application.
- Increases in:
- minimum expected market capitalization of GEM applicants at the time of listing from HK$100 million to HK$150 million and a corresponding increase in the minimum public float value of GEM companies at the time of listing from HK$30 million to HK$45 million;
- minimum expected market capitalization of Main Board applicants at the time of listing from HK$200 million to HK$500 million and a corresponding increase in the minimum public float value of Main Board companies at the time of listing from HK$50 million to HK$125 million; and
- minimum cash flow requirement for GEM applicants from HK$20 million to HK$30 million.
- Introduction of a mandatory public offering requirement of at least 10 per cent of the total offer size for all GEM IPOs.
- Extension of the post-IPO lock-up requirement on controlling shareholders from one year to two years for GEM.
Implementation and transitional arrangements
All listing applications received by the HKEx before the Effective Date will be processed according to the GEM or Main Board rules in force, with only one renewal of such applications permitted thereafter. Applications received on or after the Effective Date will be processed according to the amended GEM or Main Board Listing Rules, as the case may be.
All GEM transfer applications submitted before the Effective Date that have not lapsed, been rejected or returned as at the Effective Date will continue to be processed under the current streamlined process and their eligibility for the Main Board will be assessed in accordance with the Main Board Listing Rules currently in force, with only one renewal of such applications permitted thereafter.
For certain stakeholders who have chosen to list on GEM as a stepping stone to the Main Board, transitional arrangements (which provide for less stringent GEM transfer requirements) are in place for a grace period of three years from the Effective Date.
Comment
This is one of the biggest overhauls to the listing regime in recent years as Hong Kong seeks to regain its leading position in the world's IPO markets. Compared to the market's negative reaction just three years ago on the idea of companies with WVR structures or pre-revenue companies, the market feedback and proposals demonstrate that Hong Kong is embracing change to maintain its competitive edge as a world leading listing venue.
The proposals will help Hong Kong evolve and move away from its reliance on more traditional companies, particularly given the huge investor interest in recent technology listings. The proposals will also put Hong Kong in direct competition with the US, which has allowed WVRs for some time. The HKEx worked quickly on these two consultations and closely involved the Securities and Futures Commission in discussions to forge a way forward in line with market sentiment.
While further guidance and clarification are pending, it is clearly a step in the right direction and maintains Hong Kong as a regional forerunner in our local bourse's competitiveness.
1 With the exception of the proposals regarding (i) the track record period requirement prior to a GEM transfer, and (ii) extending the post-IPO lock up period for controlling shareholders of Main Board listing applicants.
