27 Oct 2022

(English)THE EXCHANGE PUBLISHED THE CONSULTATION PAPER ON LISTING REGIME FOR SPECIALIST TECHNOLOGY COMPANIES

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Introduction

On 19 October 2022, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper on the proposed amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) in relation to a Listing Regime for Specialist Technology Companies (the “Consultation Paper”). In particular, the Exchange seeks to create a new Chapter 18C to govern the listing of Specialist Technology Companies, taking into consideration of the high growth potential of Specialist Technology Companies (“STCs”).1 The Exchange is seeking market feedback on its proposals by 18 December 2022.

Definition of “Specialist Technology Companies”

A broad definition is adopted so as to reserve the Exchange’s flexibility to publish and update the guidance letter as specialist technology industries (“Specialist Technology Industries”) evolve over time. STC is proposed to be defined as “a company primarily engaged (whether directly or through its subsidiaries) in the research and development of, and the commercialisation and/or sales of, specialist technology products within an acceptable sector of a Specialist Technology Industry”.2

A non-exhaustive list of Specialist Technology Industries and acceptable sectors will be published and updated from time to time. The proposed industries are set out as follows:3

(i) Next-generation information technology;
(ii) Advanced hardware;
(iii) Advanced materials;
(iv) New energy and environmental protection; and
(v) New food and agriculture technologies.

The Exchange proposes not to limit eligible applicants to those with “leading-edge” technologies. This aligns with the stakeholders’ view that the success of a STC is often attributable to the successful commercialisation of the core technology rather than the innovativeness of the technology itself. Moreover, companies with multiple business segments are included in the proposed listing regime for STCs, provided that they are “primarily engaged” in the relevant business (as referred to in the definition of STC).4

Background Issues

The Exchange recognises the necessity to regulate STCs since they pose particular regulatory issues:5

Difficulty in reaching a consensus on valuation
  • STCs often operate in new markets at the early stages and thus it is difficult to predict the potential market size of the products and how successful the company will be in addressing the needs of that market.
  • Moreover, since some STCs have not commercialised their products, they are subject to risks of speculation and manipulation of their valuation. They may also modify their business models significantly which leads to share price volatility and/or trading illiquidity after listing.
    • Absence of a Competent Authority
  • The Competent Authority regime for Biotech Companies for example provides investors with a frame of reference for investors to judge the stage of development of the products, in the absence of commercial indicators.
  • However, the products of STCs are not usually required to be evaluated or approved by a Competent Authority.
  • The Exchange is also not in a position to vet or assess the truth or accuracy of the claims made by STCs in their Listing Document. Therefore, this places investors at a risk of misrepresentation.
    • Viability of a product or service
  • Since novel technology may be applied, special expertise is necessary to assess the capabilities of their products.
  • There is a risk of companies intentionally overstating these capabilities, and deficiencies in the capabilities may not be uncovered until commercialisation.
    • Failure to successfully commercialise
  • STCs may fail to successfully commercialise, since many of them are still in the early stage and are engaging in R&D to commercialise their product.
    • Reliance on external funding
  • STCs rely on external funding to support operations. Since these companies have not yet generated sufficient revenue, they would fund their working capital requirements through proceeds from equity or debt financing.
  • Moreover, additional funding might be sought by the companies after listing, resulting in dilution of existing shareholders’ ownership interest.

    • Categorisation into Commercial and Pre-Commercial Companies

    The Exchange proposes that STCs will be categorised into “Commercial” and “Pre-Commercial” companies, with revenue threshold as a “bright line” test. 6

    “Commercial Companies” are those that have achieved meaningful commercialisation of their Specialist Technology Products and achieved a minimum revenue of HK$250 million in the most recent audited financial year, and are also expected to demonstrate year-on-year growth of revenue from the Specialist Technology Business. 7 Pre-Commercial companies will be subject to more stringent requirements as stated below. 8

    Requirements

    The below table sets out a comparison of the key requirements for Commercial Companies and Pre-Commercial Companies to be eligible for listing as set out in the Consultation Paper: 9

    Commercial Companies Pre-Commercial Companies

    Qualifications for Listing
    Expected market
    Capitalisation         		At least HK$8 billion at the time of listing Qualifications for Listing
    At least HK$15 billion at the time of listing
    Revenue Threshold At least HK$250 million arising from the company’s Specialist Technology business segment(s) for the most recent audited financial year No requirement
    Research and Development (R&D) Engaged in R&D for at least three financial years
    R&D investment constitutes at least 15% of total operating expenditure for each of the three financial years prior to listing R&D investment constitutes at least 50% of total operating expenditure for each of the three financial years prior to listing
    Operational track record At least three financial years of operation under substantially the same management prior to listing
    Third-party investment Definition of Sophisticated Independent Investors (“SIIs”):

    (a) must not be a core connected person of the listing applicant (excluding a person being connected only by virtue of being a substantial shareholder); and

    (b) must be a sophisticated investor who meets any of the indicative size thresholds or qualification requirement

    Minimum investment requirements:
    The listing applicant must have received meaningful investment from SIIs, with the following indicative benchmark which must be met:

  • investment from at least two SIIs at least 12 months prior to the date of the listing application, each holding such amount of shares or securities convertible into shares equivalent to 5% or more of the issued share capital of the listing applicant as at the date of listing application and throughout the preapplication 12-month period (“Pathfinder SIIs”); and
  • at least the following aggregate investment from all SIIs as at the time of listing of:
    • Expected market
    capitalisation
    at the time of listing
    (HK$)     		Minimum total
    investment
    (as % of issued share
    capital) at
    time of listing
    ≥ 8 billion to < 20 billion 20%
    ≥ 20 billion to < 40 billion 15%
    ≥ 40 billion 10%
    Minimum total
    investment
    (as % of issued share
    capital) at
    time of listing
    ≥ 15 billion to < 20 billion 25%
    ≥ 20 billion to < 40 billion 20%
    ≥ 40 billion 15%

    IPO Requirements
    More robust price discovery process
  • Allocate at least 50% of the total number of shares offered in IPO to Independent Institutional Investors
  • Revised initial allocation and clawback mechanism as follows:
    Initial No. of times (x) of over-subscription in
    the public placing tranche
    ≥ 10x to < 50x ≥ 50x
    Minimum allocation to retail investors as % of
    total shares offered in IPO     		5% 10% 20%
    • Requirements on free float and offer size
  • Free float: minimum free float (being shares not subject to any disposal restrictions) of at least HK$600 million upon listing;
  • Offer size: the Exchange would expect the listing of a Specialist Technology Company to be accompanied by an offer (including both the placing tranche and the public subscription tranche) of a meaningful size and reserves the right not to approve the listing if the offer size is not significant enough to facilitate post-listing liquidity, or otherwise gives rise to orderly market concerns.
    		•
    Disclosure requirements
  • Additional disclosure requirement in the Listing Document to facilitate IPO investors’ assessment of a STC, including: (a) pre-IPO investments and cash flows; (b) products and commercialisation status and prospects; (c) R&D; (d) industry specific information; and (e) intellectual property.
  • A warning statement in its Listing Document that the applicant is a Specialist Technology Company and so investment in its securities carries additional risks.

    • Post-IPO Requirements
    Post-IPO lock-up
  • Post-IPO lock-up on the following persons:
    (a) controlling shareholders of the listing applicant;

    (b) key persons including founders, any weighted voting rights (“WVR”) beneficiaries, executive directors and senior management, and key personnel responsible for the technical operations and/or R&D; and

    (c) Pathfinder SIIs.

    		•
    Continuing obligations for Pre-Commercial Companies (until achieving the
    Commercialisation
    Revenue
    Threshold)     		Not applicable
  • Additional disclosure in the interim and annual reports including the timeframe for, and any progress made towards, the issuer achieving the Commercialisation Revenue Threshold; and updates on any revenue, profit and other business and financial estimates as provided in the Listing Document (and any subsequent updates to those estimates as published by the Pre-Commercial Company)
  • Shortened remedial period of 12 months (rather than the usual 18 months) for re-compliance with the sufficiency of operations requirement before delisting
  • Restricted from effecting any transaction that would constitute a material change of business without the prior consent of the Exchange
  • Identified through the stock marker “PC”

    • Analysis and Takeaways

    Since 2018, the Exchange has been active in implementing listing reforms, which range from permitting the listing of pre-revenue biotech companies, the listing of WVR Issuers that are considered innovative, to the creation of a new concessionary secondary listing route for overseas issuers listed on a qualifying exchange.

    However, it is considered that Hong Kong still lags behind the US and Mainland China in terms of the number and market capitalisation of STCs (or their equivalent), which was explained by (i) the difficulty of Pre-Commercial Companies to meet the profit, revenue or cash flow requirements of the Exchange’s Main Board eligibility tests; and (ii) that Commercial Companies are often not able to meet the Main Board tests. It is therefore crucial to develop a listing regime which is friendlier to STCs since there is a strong appetite among investors to invest in these companies due to their high growth potential, 10 which in turn increase the competitiveness of the Hong Kong market and promote Hong Kong as a fundraising and technology hub of the Greater Bay Area.

    Please contact our Mr. Rodney Teoh (Partner) and our Calvin KW Lo (Paralegal (pending admission)) for any enquiries or further information.

    This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

    1 Consultation Paper, appendix IV, at IV-4
    2 Consultation Paper p. 29
    3 Consultation Paper p. 30
    4 Consultation Paper p. 32
    5 Consultation Paper pp. 3 to 4
    6 Consultation Paper p. 34
    7 Consultation Paper pp. 4, 39 to 40
    8 Consultation Paper p. 35
    9 Consultation Paper pp. 5-10
    10 Consultation Paper pp. 2-3

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