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Regulatory Law Alert - August 2017
Submitted by // J Wong, Partner
29 August 2017


FREE MARKETS OR FREE FOR ALL: DEALING WITH NEW ECONOMY COMPANIES 

The Hong Kong Stock Exchange, or HKEX, is reviewing Hong Kong's listing regime, and has published two papers detailing its proposals to (i) enhance the GEM board ("GEM Reform Paper"); and (ii) create a new listing board separate from the existing Main Board and GEM Board ("New Board Paper"). The plan is to allow a more diverse range of companies to access capital markets in Hong Kong.

GEM Reform Paper

GEM currently allows companies to list under less stringent admission requirements than those under the Main Board, and enables them to transfer to the Main Board under a GEM "streamlined process". It seems this has achieved limited success. So, it may be time for a new approach. The table below is a snapshot of the HKEX's key proposals relating to the GEM and Main Board.

 

GEM

Main Board

 

Track record period

No change

No change

Cashflow requirement

Increased from HK$20 million to HK$30 million

No change

Minimum market capitalization at time of listing

Increased from HK$100 million to HK$150 million

Increased from HK$200 million to
HK$ 500 million

Minimum public float value at the time of listing

Increased from HK$30 million to HK$45 million

Increased HK$50 million to

HK$125 million

Controlling shareholders post IPO lock up

Current: Controlling shareholders cannot sell shares for the first six months upon listing.  For the next six months, controlling shareholders may sell shares but should retain control

Proposal: Controlling shareholders cannot sell shares for the first year upon listing. For the next year, controlling shareholders may sell shares but should retain control

Public offering

Previous: free to decide the offering mechanism provided disclosure is made.

Proposal: mandatory offering of at least 10% of the total offer size

No change


The New Board Paper

The HKEX also wants to attract "New Economy" industries to Hong Kong, such as technology companies. The HKEX has proposed a New Board to accommodate pre-profit companies, companies with non-standard governance features (including Weighted Voting Rights ("WVR") structures) and Mainland Chinese companies that wish to secondarily list in Hong Kong.

The New Board Paper proposes a new board, with two "segments":

  • New Board PRO, for companies that do not meet the financial or track record criteria for GEM or the Main Board; and 
  • New Board PREMIUM, for companies that meet the existing financial and track record requirements of the Main Board, but which are currently ineligible to list because they have non-standard governance structures.
 

New Board PRO

New Board PREMIUM

Who can invest?

Professional investors only

Professional and retail investors

Market cap requirements 

No track record or minimum financial criteria, market cap of over HK$200 million

Quantitative entry requirements same as Main Board

Listing Adviser

Financial Adviser

Sponsor

Listing Documents

“Listing Document” which contains all material that would be required by a professional investor in order to make an investment decision

Prospectus

Listing Approval

Listing Department

Listing Committee

Fast track delisting

After 6 months of suspension

After 90 calendar days of suspension

Public float

Requirement that a listing applicant has a minimum of 100 investors at the time of listing and a minimum public float at listing of 25% (same as the current requirement for GEM)

Follow the Main Board open market requirements. Equity securities of an applicant must be held by at least 300 holders with a public float requirement of 25% of the total number of issued shares


Impact on market participants

Many observers believe that Hong Kong missed out on important listing opportunities so this could be a welcome opportunity to open Hong Kong’s market to a more diverse range of issuers.

Others are, however, concerned that loosening these changes to the regulatory regime may weaken Hong Kong's high regulatory standards.

The HKEX recognises the concerns and has proposed possible approaches to manage these risks including prominent disclosure of WVR and other "non-conventional" governance structures and the associated risks as well as sunset clauses (that is, the structure expires after a certain period of time).

The deadline for feedback from the market has just passed, and now we await the HKEX's next steps. There seems to have been general support for the HKEX's initiatives, so we predict that -

  • The New Board will be established (although whether New Board PREMIUM will exist on a standalone basis or as a separate segment on Main Board remains to be seen).
  • Companies with WVR or other "non-conventional" structures will be allowed to list, with safeguards such as clear disclosure.
  • Other changes considered to be necessary to empower investors such as class action lawsuits and litigation funding will gain traction and, hopefully, some positive attention from the government and regulators.

It remains to be seen how HKEX will handle the more difficult tasks of repositioning GEM, defining what are "New Economy" companies and deterring "shell farming" (the listing of a company that is eventually taken over and into which the buyer inserts assets; hence the new business has bypassed the intense scrutiny of the usual listing process).


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Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@hwbhk.com if you have any questions about the article.