On 3 March 2022, the Financial Services Development Council (the “FSDC”) released a research report, recommending the Securities and Futures Commission (the “SFC”) and the Hong Kong Exchanges and Clearing Limited (the “HKEX”) to reform Hong Kong’s listing framework, with an objective to boost the competitiveness of Hong Kong as the leading Asian bourse and maximise the capital markets in Hong Kong.
In essence, the FSDC’s recommendations included the following:
• Consider whether the distinguishing features of the listing framework for pre-revenue biotech companies (Chapter 18A of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and special purpose acquisition companies (Chapter 18B of the Listing Rules) (“SPACs”) can be applicable to new economy companies;
• Review and clarify the subjective eligibility requirements of “innovativeness” for issuers with weighted voting rights (the “WVR”) structure to list in Hong Kong (Chapter 8A of the Listing Rules), with the policy aim of not making companies with WVR structure “commonplace” and retain investor protection;
• Continuously and holistically review the listing regime to cope with the evolving environment and market needs; and
• Provide more support to small and medium enterprises’ (“SMEs”) fundraising needs and access to the capital market, such as exploring a new listing framework and reviewing the existing GEM board regime.
Creating a friendly listing framework for innovative pre-revenue companies
New economy companies (e.g. hard technology, new energy, Software-as-a-Service, big data and artificial intelligence) are new, high-growth industries with cutting edge technology. Given their new and innovative nature, these companies often require heavy investment and funding in research and development (“R&D”) prior to being fully profitable. They also see a longer product development cycle. As traditional financers focus on a company’s financial track record, new economy companies would find it difficult to have access to capital and investments. Therefore, the FSDC suggested that it is crucial to remain flexible in the listing regime to cater for these new economy pre-revenue companies in order to capture these opportunities alongside appropriate investor safeguarding. The FSDC suggested that the HKEX could introduce a new chapter to the Listing Rules like Chapter 18A, to capture these fast-growing R&D intensive sectors, which could be the way forward to allow more pre-revenue new economy companies with great prospect and market potential to be listed on HKEX.
Riding on the successful emergence of the new economy in China and the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), the Chapter 18A and the recent introduction of Chapter 18B, the FSDC drew attention to the listing frameworks of pre-revenue biotech companies and SPACs and viewed that that the HKEX and SFC should consider the distinguishing and the successful features of their listing frameworks which could be applicable to a new specific framework for these new economy companies.
In particular, akin to these biotech companies, many non-biotech new economy companies also have long business development cycles before demonstrating revenue or profits. Thus, the FSDC considered if some of the features in Chapter 18A could be incorporated into those of the new economy companies, such as the enhanced disclosure requirement, the involvement of sophisticated investors, rounds of fundings and competent authorities.
Furthermore, in the up-and-coming new economy sectors, investors would be expected to be equipped with technological and financial sophistication as well as a higher level or risk tolerance. This is the reason why the FSDC also considered the SPAC to serve a useful reference for a potential regime for pre-revenue innovative companies. Therefore, the FSDC recommended that some of the features in Chapter 18B could be also applicable to these new economy companies, such as the involvement of professional investors only at the initial stage and the requirement of additional private investment in public equity (PIPE) funding, where investors are expected to be more sophisticated in finance and tolerant to risk.
Review and clarify the “innovativeness” requirement for issuers with WVR structure
At present, according to Chapter 8A and 19C of the Listing Rules and the Guidance Letter HKEX-GL94-18, issuers seeking to list with a WVR structure must be an “innovative company”. The FSDC has recognised that some bankers and legal professionals considered that the “innovativeness” requirement is subjective and brings uncertainty to the Listing Rules, ultimately causing discouragement to companies seeking to list in Hong Kong. For instance, a first mover issuer from a new economy industry may be sufficiently “innovative” to obtain listing approval. However, subsequent companies of a similar nature or industry with higher market capitalisation and business scale may then not fulfil the “innovativeness” requirement as they then fail to differentiate themselves from the precedent case. These potential issuers are thereby less likely to list in Hong Kong in view of the lesser certainty.
In comparison, the FSDC examined both the Science and Technology Innovation Board, also known as STAR Market, of Shanghai Stock Exchange (the “SSE”) and the ChiNext of Shenzhen Stock Exchange. Despite both exchanges targeting growing innovative or sci-tech innovation companies, they do not provide potential issuers with any subjective definition or guidance of “innovativeness”. On the other hand, these exchanges adopt a set of objective listing standards that take account quantifiable factors such as business integrity, profits and revenue. The FSDC also highlighted that the SSE’s STAR opens doors for companies which are “yet to be profitable or have accumulated deficits” to be listed. Therefore, the FSDC suggested that the subjective eligibility of “innovativeness” for issuers with WVR structure should be reviewed and clarified while recognising the policy direction of WVR to not to be ‘common place’ and retain investor protection.
Furthermore, with the policy of not making companies with WVR structures “commonplace”, the FSDC also observed that the Hong Kong listing regime for WVR companies is more prescriptive in comparison with other markets. For instance, the US regime adopts a “disclosure-based regime with few restrictions on the WVR structure” for companies with dual-class shares structures, while Hong Kong requires enhanced disclosure and corporate governance structure. The strict investor safeguards imposed in Hong Kong have prevented WVR structures from being widespread and commonplace. Nevertheless, the FSDC advised that the definition and interpretation of “innovativeness” should be clarified to accommodate companies with varying degrees of innovativeness.
Continuously and holistically review the listing system to cope with the evolving environment and market needs
Currently, continued geopolitical uncertainties linger the business operations of Chinese stocks listed in the US, which may in turn affect the global IPO market. Companies already listed or considering listing on other exchanges may be looking for alternatives. There has been a surge in issuer interest in Hong Kong as a potential second listing option.
Notwithstanding such interest, companies including those whose business is centered in Greater China still face several hurdles when seeking to list in Hong Kong. The FSDC identified the relatively time-consuming IPO process, and the exemption system for issuers with primary listings on eligible exchanges as existing hurdles. To maximise the potential of listing market and the broader capital market, the FSDC suggested that further optimization should be explored to streamline and maximize the effectiveness of the listing process of oversea issuers.
Provide more support to SMEs
International and Mainland support
There are increasing emphasis being placed on supporting SME financing globally. Observing the reformative establishment of the Beijing Stock Exchange (“BSE”), the FSDC highlighted the BSE’s success since it started trading on 15 November 2021. 11 new companies have debuted through IPOs, alongside the 71 listed companies that transferred from the premium board of the National Equities Exchange and Quotations (NEEQ). As at 12 November 2022, over 2.1 million investors applied for access as qualified investor for the BSE, with over 4 million investors estimated to be eligible. Furthermore, 112 securities firms have been granted official membership of the BSE. The FSDC suggested that Hong Kong may consider to approach its own SME initiatives by taking reference to the BSE’s adoption of R&D spending as an eligibility criterion, to support the technology and research driven growth companies.
A comprehensive and open review of GEM
GEM was established in 1999 with the aim of providing funding support to SMEs. However, since the reform of GEM into a standalone market and the removal of the streamlined process for GEM transfers to the Main Board, GEM listing activities have greatly declined. In 2020, the market only saw 8 listings and HK$3.6 billion of total funds raised through GEM. Notwithstanding the development of the GEM Board, many SMEs which are in the growth and development stage may find themselves ineligible for GEM Board listing. This is because while GEM Listing Rules do not impose profitability requirements for potential issuers, the operating cash flow and market capitalisation requirements, together with the strict and time-consuming IPO vetting process may limit those smaller potential issuers to gain access to capital markets, ultimately causing the relative inactivity of GEM. For instance, the minimum aggregate operating cashflow of HK$30 million deters growth companies with high valuations but are yet to incur revenue or profit.
As the growth potential of SMEs is tremendous, the HKEX should re-evaluate whether the existing market structure is still conducive for SMEs to seize opportunities. To do so, the FSDC is of the view that HKEX should conduct a comprehensive and open review of GEM Board, including to revamp GEM Board as an incubator of early-stage fast-growing companies in order to allow SME access.
According to the FSDC, the financial industry and market participants generally hold a view that Hong Kong can take a more aggressive approach to support SMEs. Some comment that a new market mechanism supporting SME financing should be explored, and that such a mechanism could be incorporated into a market where only professional investors can participate. There is a pressing need for Hong Kong to respond to such opinions and readjust its market segmentation strategy.
Analysis and Takeaways
In light of the accelerated advancement of the new economy sectors and Hong Kong long praised attractiveness as a strong international fund-raising financial centre, the FSDC has encouraged HKEX and SFC to take active steps in refining its listing regime to cope with the evolving environment and the market needs. It is worth-taking to expand the pre-revenue requirement to cater for new economy companies and review and clarify the subjective requirement of “innovativeness” for issuers with WVR listed through Chapter 8A of the Listing Rules. The cultivation of biotech and new economy ecosystem may create demands for new homecoming listings. Also, considering the globally increasing emphasis on the financial support to the SMEs, Hong Kong should explore a new listing framework to assist their capital needs. These recommendations encourage Hong Kong listing regime’s opportunities arising from the latest IPO landscape and stay ahead in the race and to continue vitalising the capital market.
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