Introduction 

On 26 September 2023, The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) published a consultation paper (the “Consultation Paper”) inviting public feedback on its proposed GEM listing reforms.

The proposed reforms aim at bolstering GEM’s attractiveness while maintaining high standards of investor protection.  The three main proposals include: (1) a new alternative eligibility test for companies in the high-growth segment; (2) removal of quarterly reporting requirements; and (3) a new streamlined transfer mechanism for eligible GEM companies to transfer to the Main Board.  The consultation period would last for six weeks, ending on 6 November 2023.

Proposed Reforms

Initial Listing Requirements

The Hong Kong Stock Exchange noted that GEM’s positive cash flow requirement deters the listing of companies with high growth potential that do not have a track record of positive operating cash flow since they are engaged heavily in R&D.  With reference to the Beijing Stock Exchange’s adoption of R&D spending as an initial listing eligibility criterion, the Hong Kong Stock Exchange proposes to introduce an alternative financial eligibility test targeting high growth enterprises that are heavily engaged in R&D activities (the “market capitalisation / revenue / R&D test”).

Under the market capitalisation / revenue / R&D test, GEM listing applicants must have:

(a)   an adequate trading record of at least two financial years;

(b)   an expected market capitalisation of at least HK$250 million at the time of listing;

(c)   revenue of at least HK$100 million in aggregate for the two most recent audited financial years, with year-on-year growth over the two financial years; and

(d)   incurred R&D expenditure of at least HK$30 million in aggregate for the two financial years prior to listing, where the R&D expenditure incurred for each financial year must be at least 15% of its total operating expenditure for the same period.

Lock-up period

Given shell activities have largely ceased due to joint efforts of the Hong Kong Stock Exchange and the Securities and Futures Commission, the Hong Kong Stock Exchange considers it unnecessary to have a prolonged lock-up period for GEM controlling shareholders.  Therefore, the Hong Kong Stock Exchange also proposed to reduce the post-IPO lock-up period imposed on GEM controlling shareholders from 24 months to 12 months.

Continuing Obligations

To reduce the compliance costs incurred by GEM issuers, the Hong Kong Stock Exchange purported to align the relevant GEM’s continuing obligations in line with those for Main Board issuers.

The Hong Kong Stock Exchange proposed removing quarterly reporting as a mandatory requirement for GEM issuers.  Nevertheless, quarterly financial reporting will be a recommended best practice in GEM’s Corporate Governance Code.  As a result, a GEM issuer would be required to publish only:

(a)   annual reports not later than four months after the end of each financial year; and

(b)   interim reports not later than three months after the end of the first six months of each financial year.

Accordingly, the Hong Kong Stock Exchange suggested requiring a GEM issuer to publish preliminary announcements of results for the first six months of each financial year not later than two months (instead of the shorter 45 days now required) after the end of that six-month period.

With a view to match GEM issuer’s ongoing compliance officer and compliance adviser obligations with those of the Main Board, the Hong Kong Stock Exchange also proposed to:

(a)   remove the existing requirement for one of the executive directors of a GEM issuer to assume responsibility for acting as the issuer’s compliance officer; and

(b)   shorten the period of engagement of the compliance adviser of a GEM issuer so that it ends on the date on which the issuer publishes its financial results for the first (instead of the second) full financial year commencing after the date of its initial listing.

It is worth noting that certain GEM requirements in relation to the compliance adviser’s responsibilities are to be removed, including: (1) due diligence on listing documents published, and dealing with the Hong Kong Stock Exchange, in relation to certain transactions during the period of engagement of the compliance adviser; and (2) disclosure of interests of the compliance adviser for this purpose.

Transfer Mechanism

Following the abolishment of the previous GEM streamlined process in 2018, GEM has been positioned as a “stand-alone board” for small and/or medium-sized enterprises (“SMEs”).  As a number of targeted actions have been taken to tackle the issues relating to shell activities, the Hong Kong Stock Exchange now considers it appropriate to reinstate a streamlined transfer mechanism to enable qualified GEM issuers to transfer their listings to the Main Board, without the need to (1) appoint a sponsor to carry out due diligence, or (2) produce a “prospectus-standard” listing document.

Under the streamlined transfer mechanism, a GEM issuer that intends to transfer to the Main Board must:

(a)   meet all the qualifications for listing on the Main Board;

(b)   have published financial results for three full financial years as a GEM issuer with ownership continuity and control and no fundamental change in its principal business;

(c)   meet

• i.          a daily turnover test – a streamlined transfer applicant must have reached a prescribed minimum daily turnover threshold (proposed to be either HK$100,000 or HK$50,000) on at least 50% of the trading days over a prescribed reference period of 250 trading days before the transfer application and until the commencement of dealings on the Main Board (the “Reference Period”);
• ii.          a volume weighted average market capitalisation test – a streamlined transfer applicant must have a volume weighted average market capitalisation over the Reference Period that could meet the minimum market capitalisation requirement for Main Board listing; and
• iii.          a clean compliance record – requirement over the 12 months preceding the transfer application and until the commencement of dealings on the Main Board.

Where a GEM issuer cannot meet these eligibility requirements under the streamlined transfer mechanism, the issuer may still apply for a transfer to the Main Board under the existing requirements.

Analysis and takeaways

The last key reform to GEM took place in 2018 with an aim to improve the overall quality of GEM listings.  However, in view of the rapid development of stock exchanges in other jurisdictions, in particular the Beijing Stock Exchange in recent years, GEM seems to have lost competitiveness to its counterparts.  The general lack of GEM listings in the recent years is noted.  Therefore, there has long been a demand for transformation of GEM to vitalise its competitiveness to SMEs.

In this long-awaited reform proposal, the Hong Kong Stock Exchange has proposed to reinstate the streamlined transfer mechanism.  While attempting to encourage new GEM listings, the Hong Kong Stock Exchange appears to be cautious in outlining the proposed reforms to strike a balance between facilitating fundraising and investor protection.  It remains to be seen whether the proposed reforms would be perceived as conducive to reviving the GEM market.

Please contact our Partner Mr. Rodney Teoh 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.

Introduction

On 21 September 2023, the Securities and Futures Commission (the “SFC”) published the consultation conclusions (the “Consultation Conclusions”) addressing comments on the amendments to the Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”) proposed in its consultation paper dated 19 May 2023 (the “Consultation Paper”).

During the consultation period which ended on 23 June 2023, the SFC received in total 12 responses from the public.  After considering the comments made by the respondents, the SFC has adopted all of the amendments proposed in the Consultation Paper, some with slight modifications.  For more details of the amendments to be made to the Codes, please refer to our news update on the Consultation Paper.  The said amendments have become effective on 29 September 2023.

The SFC has marked the several modifications to its original proposals in Appendix 2 of the Consultation Conclusions, of which the material changes from the Consultation Paper are summarised below:

Part 2: The Chain Principle
 
In the Consultation Paper, the SFC proposed to expand Note 8 to Rule 26.1 to give better guidance on the factors to be considered by the Executive Director of the Corporate Finance Division of the SFC (the “Executive”) in deciding whether a mandatory general offer for the second company is required when statutory control of the first company that holds 30% or more of the voting rights of the second company is obtained or consolidated by a person or group of persons.  The SFC adopted market capitalisation as one of the comparison parameters in light of its objectivity and that it is a widely accepted indicator of company size.

The proposed amendment was generally well received by the respondents as it could provide clarity on assessing whether a chain principle offer is required.  In response to one of the comments, the SFC made a slight modification in the Consultation Conclusions to clarify in the drafting that the market capitalisation test is only relevant where both companies are listed.
 
Part 3: Offer Period and Timetable (Last possible day for Day 60 in privatisations and take-private transactions)

The SFC proposed to amend Rule 15.5 to codify its practice that any consents to extend “Day 60” (the last day on which an offer must be declared unconditional as to acceptances) would not exceed 4 months after the despatch of the offer document, which is in line with the spirit of Rule 2.11.  Despite a comment suggesting the term “Day 60” be renamed, the SFC believes keeping the use of such term has its merits as it is commonly understood by the market to refer to the last day on which an offer can be declared unconditional as to acceptance.  In light of a comment requesting the Executive to clarify whether the 4-month period under Rule 15.5 should start from the initial offer document or the date of any revised offer document, the SFC made clear that it runs from the date of the initial offer document, consistent with the spirit of Rule 2.11.

Part 5: Partial Offers (Comparable offer for convertible securities, warrants, etc.)

Part 5 of the Consultation Paper proposed the addition of Rule 28.10, requiring Rule 13 comparable offers for convertibles, warrants options and subscription rights in a partial offer to incorporate the market practice of making such offers in a partial offer.  In the Consultation Conclusions, the proposed wording of the new Rule 28.10 has been modified and now refers to “comparable” offers rather than “appropriate” offers to elucidate that an offer for convertibles only have to be made for the same percentage as the partial offer for shares.

Part 7: Miscellaneous Amendments (Definition of “on-market share buy-back”)

The SFC proposed in the Consultation Paper to define that on-market share buy-backs are only limited to those made according to the Stock Exchange’s automatic order matching system where buy-orders and sell-orders are matched through an automated system.  Moreover, the company buying back its shares and its directors should not have any involvement in the solicitation, selection or identification of the seller of the shares (whether directly or indirectly).  The use of the automatic order matching system was considered by the SFC to be a good prima facie indicator that the company and its directors are not involved in the share buy-back.

All respondents were supportive of the proposed amendment, while one requested the SFC to confirm that the appointment of a broker to effect a share buy-back is not by itself considered as direct or indirect involvement by the company or its directors in soliciting, selecting or identifying sellers.  Therefore, in the Consultation Conclusions, the SFC added the following note:

“Note to the definition of on-market share buy-back:
 
The appointment of a broker to effect buying-back of shares would not in itself be treated as the company or its directors being involved in the solicitation, selection or identification of sellers of shares.”

Analysis and Takeaways

With a view to bringing greater certainty to the market, the SFC has put enormous effort in codifying the Executive’s existing practice in the Consultation Paper, and has further made clarifications to the same in the Consultation Conclusions.  As to the transactions that have already been announced before the amendments come into force, it is advised in the Consultation Conclusions that the Executive be consulted to then search for a fair solution for all parties involved.

Please contact our Mr. Rodney Teoh (Partner) 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.

Introduction

In response to growing concerns regarding unregulated virtual asset trading platforms (“VATPs”), on 25 September 2023, the Securities and Futures Commission (the “SFC”) announced the introduction of a series of measures aimed at reinforcing information dissemination and investor education.

Recognising both the potential benefits and risks associated with virtual asset activities, the SFC has been at the forefront of implementing a comprehensive regulatory framework since 2017.  The SFC has also been monitoring virtual asset activities in Hong Kong to detect possible breaches of law under its regulatory remit through gathering information from different sources, including market news, media reports, frequent dialogues with the industry, complaints and social media.  Where appropriate, the SFC would put entities on the Alert List and refer cases to the Police for further investigation.

 New Measures

The SFC has been working closely with its subsidiary, the Investor and Financial Education Council (the “IFEC”), to educate and warn investors about the risks associated with trading on unregulated virtual asset platforms.  The recent JPEX incident highlighted the importance of proper regulation and information dissemination to maintain market confidence.  In light of this, the SFC will be implementing the following measures:

Analysis and takeaways

With its comprehensive regulatory framework and proactive approach, the SFC is committed to protecting investors’ interests, maintaining market confidence, and fostering a sustainable and responsible development of the Web3 ecosystem in Hong Kong.  By implementing stringent measures, enhancing investor education, and collaborating with other regulators and stakeholders, the SFC aims to create a well-regulated environment for virtual asset trading and to mitigate any potential risks.

Please contact our Partner Mr. Rodney Teoh 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.

Background
On 17 February 2023, the State Council of the PRC issued the “Decision of the State Council to Repeal Certain Administrative Regulations and Documents”, and the China Securities Regulatory Commission (“CSRC”) issued the “Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies” and related guidelines (“New Regulations on Overseas Listing”). The New Regulations on Overseas Listing came into effect on 31 March 2023, followed by the repeal of the Special Regulations¹ and the Mandatory Provisions² .

Under the New Regulations on Overseas Listing, PRC issuers shall formulate their articles of association with reference to the Guidelines for the Articles of Association of Listed Companies issued by the CSRC. The New Regulations on Overseas Listing no longer require PRC issuers to follow the previously implemented Mandatory Provisions to (i) deem holders of domestic shares and H shares (which are both ordinary shares) as different classes of shareholders, thereby removing the class meeting requirements applied to holders of domestic shares and H shares in certain circumstances; and (ii) use arbitration to resolve disputes involving H shareholders, thereby removing the arbitration requirements.

The New Regulations on Overseas Listing also introduced a new filing regime for all direct and indirect overseas listings and securities offerings by Mainland based companies.

The amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules“) will come into effect on 1 August 2023, and are summarised in the table below:

Analysis and takeaways
The Exchange has made corresponding amendments to the Listing Rules to align with the regulatory rules in Mainland China, and ensure that the rules applicable to Chinese issuers are more consistent with other overseas companies.

PRC issuers must still adhere to their existing articles of association concerning class meetings and other provisions that were originally formulated based on the Mandatory Provisions until and unless they amend their articles of association to remove such provisions. In general, where PRC issuers voluntarily propose to amend their articles of association to remove the class meeting requirements, they should obtain approvals of domestic shareholders and H shareholders at separate class meetings based on their existing articles of association.

Please contact our Partner Mr. Rodney Teoh 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.

¹The Special Regulations on the Overseas Offering and Listing of Shares by Joint Stock Limited Companies (國務院關於股份有限公司境外募集股份及上市的特別規定) issued by the State Council of the PRC on 4 August 1994, as amended, supplemented or otherwise modified from time to time.
²The Mandatory Provisions for Companies Listing Overseas set forth in Zheng Wei Fa (1994) No. 21 issued on 27 August 1994 by the State Council Securities Policy Committee and the State Commission for Restructuring the Economic System.