Definition of “Specialist Technology Companies”

The Exchange will adopt the proposed definitions of STCs without amendment,¹ which is 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 (“STPs”) within an acceptable sector of a Specialist Technology Industry”.

STP is defined as “a product and/or service (alone or together with other products or services) that applies Specialist Technology”, and “Specialist Technology” is defined as “science and/or technology applied to products and/or services within an acceptable sector of a Specialist Technology Industry”.²

List of Specialist Technology Industries and acceptable sectors

In respect of the Specialist Technology Industries and acceptable sectors, the Exchange will adopt the proposed list set out in the Consultation Paper with amendments, and the list will be published in the Guidance Letter to be updated from time to time by the Exchange after consultation with the Securities and Futures Commission and with its approval.³ Summary of the list of Specialist Technology Industries and the non-exhaustive acceptable sectors are as follows:⁴

The Exchange has specifically excluded blockchain and digital asset related business in the list as such companies’ success is considered generally attributable to the expansion of mining capacity, rather than the application of new technology, with minimal contribution of research and development (R&D) to the companies’ expected value⁵ .

Applicants falling outside the existing list of Specialist Technology Industries and acceptable sectors

An applicant falling outside the list of Specialist Technology Industries or acceptable sectors above may still be considered as “within an acceptable sector of a Specialist Technology Industry” for the purpose of the definitions of STC and “Specialist Technology” if it can demonstrate that:⁶

(a) it has high growth potential;

(b) its success can be demonstrated to be attributable to the application, to its core business, of new technologies and/or the application of the relevant science and/or technology within that sector to a new business model, which differentiates it from traditional market participants serving similar consumers or end users; and

(c) research and development significantly contributes to its expected value and constitutes a major activity and expense.
Such applicant must submit a pre-IPO enquiry to the Exchange before submitting a listing application under Chapter 18C of the Listing Rules⁷ , and the Exchange will assess by taking into account all relevant facts and circumstances and consult with the SFC and seek its approval.⁸

Companies with multiple business segments

In respect of applicants with multiple business segments, the Exchange will adopt a holistic assessment of the non-exhaustive factors set out in the Guidance Letter and take into account the following additional factors when assessing whether an applicant is eligible for listing under Chapter 18C:⁹

(a) the proportion of the revenue (if any) generated by the Specialist Technology business segment(s) relative to the total revenue of the company (instead of prescribing a “bright line” percentage threshold); and

(b) the reason for retaining the non-Specialist Technology business segment(s) and the history of the company’s operations.

Categorisation of Commercial / Pre-Commercial Companies

The Exchange has adopted its proposal to accommodate the listings of Commercial Companies and Pre-Commercial Companies, with more stringent requirements imposed on Pre-Commercial Companies than Commercial Companies¹¹ , and that all investors (including retail investors) be allowed to subscribe for, and trade in, the securities of Pre-Commercial Companies.¹²

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 Conclusions:

Additional qualification requirements for Pre-Commercial Companies²⁴

• Primary reason for listing must be for raising funds for the R&D of, and the manufacturing and/or sales and marketing of, its STPs to bring them to commercialisation and achieving the Commercialisation Revenue Threshold (i.e. HK$250 million for an audited financial year);
• Demonstrate, and disclose in its Listing Document, a credible path to achieving the Commercialisation Revenue Threshold; and
• Have available working capital (after taking into account the IPO proceeds of the applicant) to cover at least 125% of its group’s costs (which must substantially consist of general, administrative and operating costs and R&D costs) for at least the next 12 months

Post-IPO lock-up²⁵

Scope of the target persons subject to post-IPO lock-up of STCs is wider than the main board issuers with a longer lock-up period. In particular, the applicable post-IPO lock-up for STCs is as follows:

Analysis and Takeaways

While the value of STCs may be difficult to estimate, due diligence and in-depth research on the capabilities of performance of STCs, as well as the participation of investors with professional experience and industry expertise are crucial to the price setting of shares of STCs. The IPSI mechanism, with a 50% share allocation percentage requirement, introduced by the Exchange in view of overcoming the difficulty in price-setting, has in fact created certain challenges for STC listing applicants as they lose some flexibilities in seeking general investors’ support.

Nevertheless, the introduction of the IPSI mechanism, together with other adjustments made after considering the market feedback, such as lowering the market capitalisation requirement for listing and modifying the requirements for the minimum R&D expenditure ratio, demonstrated the Exchange’s efforts in promoting the feasibility of the new listing regime without compromising the protection offered to investors.

This new route to the market is expected to support some of the most innovative and progressive companies of the future. Since the listing reforms implemented by the Exchange in 2018, Hong Kong has made a great leap forward in catching up with the international capital market’s development progress of regulatory framework to accommodate the ever-changing market needs. The introduction of such series of rules and regulatory frameworks, including this new Specialist Technology chapter, will greatly enhance Hong Kong’s competitiveness as a fundraising market in Asia, and Hong Kong would be able to make an even greater use of its connectivity with Mainland China.

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.

¹ Conclusions, p. 6
² Conclusions, pp. 6 and 7
³ Conclusions, p. 12
⁴ Conclusions, pp. V-2 to V-6, paragraph 7 of the Guidance Letter
⁵ Conclusions, pp. 10 to 11
⁶ Conclusions, pp. 11 and V-7, paragraph 10 of the Guidance Letter
⁷ Conclusions, p. V-7, paragraph 11 of the Guidance Letter
⁸ Conclusions, p. V-7, paragraphs 12 and 13 of the Guidance Letter
⁹ Conclusions, pp. 14 and V-8, paragraphs 16 and 17 of the Guidance Letter
¹⁰ Companies 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.
¹¹ Conclusions, pp. 17-18
¹² Conclusions, pp. 18-19
¹³ Conclusions, pp. 1, 22 to 29
¹⁴ Conclusions, pp. 29 to 31
¹⁵ Conclusions, pp. 2 and 39 to 42
¹⁶ Conclusions, pp. 42 to 43
¹⁷ Conclusions, pp. 45 to 62
¹⁸ Conclusions, pp. 58-59
¹⁹ Conclusions, p. 60
²⁰ Conclusions, pp. 75-84
²¹ Conclusions, pp. 82 to 84
²² Conclusions, pp. 84 to 88
²³ Conclusions, p. 90
²⁴ Conclusions, pp. 63 to 70
²⁵ Conclusions, pp. 93 to 100
²⁶ Key personnel responsible for the STC’s technical operations and/or the R&D of its STP(s) (including the head and the key personnel of its R&D department) whose expertise is primarily relied upon by the company for the development of its STP(s), and the lead developer(s) of the core technologies in relation to the STP(s). In determining whether a person should be designated as a Key Technical and R&D Personnel, an applicant should consider factors including the shareholding of such personnel, his/her remuneration relative to other R&D staff, and his/her seniority.

Key Regulatory requirements

A. Key proposed regulatory requirements for licensed VA Trading Platforms

Upon the commencement of the AMLO VASP regime, it is proposed that VA Trading Platforms licensed by the SFC shall comply with the Guidelines for Virtual Asset Trading Platform Operators (“VATP Guidelines”). Such VATP Guidelines will be based on the existing regulatory requirements applicable to SFO-licensed platform operators (“LPOs”), and particularly, the Terms and Conditions for VA Trading Platform Operators (VATP Terms and Conditions).

The proposed regulatory requirements under VATP Guidelines cover various aspects and areas, such as fit and proper requirement, compliance with the general principles, financial soundness, operations, prevention of market manipulative and abusive activities, dealing with clients, custody of client assets, management, supervision and internal control, cybersecurity, conflict of interests, record keeping, auditors, ongoing report obligations.¹ The SFC also emphasise the “same business, same risks, same rules” approach, which requires VA providers of the same risk level to be subjected to the same obligations but adapted to address the specific risks of virtual assets (“VA(s)”), aiming to provide investors with more protection under the backdrop of the collapse of the Luna token and Terra stablecoin.² After the AMLO VASP regime comes into effect, the VATP Terms and Conditions will be superseded. All platform operators, whether licensed under the SFO and/or the Anti-money Laundering Ordinance (“AMLO”), will be subject to the VATP Guidelines.

B. Dual Licences

Upon the commencement of the AMLO VASP regime, the SFC will regulate the trading of security tokens by VA Trading Platforms under the existing SFO regime and regulate the trading of non-security tokens by VA Trading Platforms under the AMLO VASP regime.

Given that a VA may evolve from a non-security token to a security token (or vice versa), VA Trading Platforms (together with their proposed responsible officers and licensed representatives) should apply for approvals under both the existing SFO regime and the AMLO VASP regime and become dually licensed and approved.

C. Proposal to allow retail access to licensed VA Trading Platforms³

When the existing SFO regime was introduced in 2018, it was more prudent to restrict SFO-licensed VA Trading Platforms to serve professional investors only. In this regard, the SFC notes the public’s diverse views on whether retail investors should be allowed access to the services of licensed VA Trading Platforms.

In January 2022, the SFC allowed for the first-time retail investors to access a limited suite of regulated virtual asset-related derivative products traded on conventional exchanges. Later in October 2022, the SFC put in place a regime for authorising virtual asset futures exchange-traded funds. Retail investors, thus, since then have indirect access to Vas through regulated products in Hong Kong (see our news update for details).

Since more global financial institutions and service providers have entered the market, the SFC proposes to allow all types of investors, including retail investors, to access trading services of “Eligible large-cap VAs” offered by LPOs, provided that the VAs are included in at least two “acceptable indices” issued by at least two independent index providers. LPOs should also take into account other general token admission criteria including the market capitalization, trading volume, security of protocols, and internal compliance of the VAs before admitting them for trading.⁴

D. Consultations Questions⁵

Some of the key questions set out by the SFC for industry and public feedback, together with their corresponding views, are extracted as follows:

Key measures of the transitional arrangements and implementation details for the AMLO VASP regime

E. Eligibility for the transitional arrangements

To be eligible for the transitional arrangements, a VA Trading Platform must be pre-existing, i.e., in operation in Hong Kong prior to 1 June 2023 and with meaningful and substantial presence. To determine the same, the SFC will take to account the following non-exhaustive factors including (a) whether it is incorporated in Hong Kong; (b) whether it has a physical office in Hong Kong; and (c) whether its Hong Kong staffs have central management and control over the VA Trading Platform.¹⁰

F. Key dates and implementation details of the transitional arrangements

For pre-existing VA Trading Platform which intends to apply for a licence, it must submit a fully completed licence applicable online under the AMLO VASP regime between 1 June 2023 and 29 February 2024. It will be asked to confirm and demonstrate that it has been operating a VA Trading Platform in Hong Kong immediately before 1 June 2023 and it will comply with the applicable regulatory requirements.

For pre-existing VA Trading Platform that does not intend to apply for a licence, it should start preparing to close down its business in Hong Kong in an orderly manner. While the strict deadline for these platforms to close down is 31 May 2024, the SFC expects them to cease any active marketing of their services in Hong Kong.

By 1 June 2024, all VA Trading Platforms in Hong Kong must have been either deemed to be licensed or granted a licence by the SFC. The SFC will take immediate action against any unlicensed VA Trading Platforms.

Analysis and takeaways

Subsequent to the Government’s Policy Statement on its plan and approach for the VASP regime (see our news update), this Consultation Paper is a timely attempt to translate visions into practices and denotes a significant milestone in the global regulatory regime over VAs. SFC is committed to taking the forefront role in expanding the retail market for VAs in Hong Kong by implementing legal safeguards for different stakeholders. It helps retail investors acclimate to the volatile market and enables retail investors’ access to regulated trading platform under a protective and effective system. This Consultation Paper, together with the previously unveiled regulations, foster a new wave of market opportunities and capital investments while modernising Hong Kong’s financial market, which aligns with the global trajectory of further utilising VAs.

As such, we welcome the SFC’s proposals and would be happy our perspectives on the Consultation Paper for facilitating local VA services. We would also like to take the opportunity to encourage you to have discussion with us and share your views on this topic.

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.

¹ Please see p.10-11 of the Consultation Paper for the full list and corresponding explanation of the existing regulatory requirements.
² P.7 of the Consultation Paper.
³ P.12 of the Consultation Paper.
⁴ P.16 of the Consultation Paper.
⁵ P.12-23 of the Consultation Paper.
⁶ Please see p.15 of the Consultation Paper for the full list of general non-exhaustive token admission criteria suggested by the SFC.
⁷ Please see p.16 of the Consultation Paper for the specific token admission criteria, particularly on requirements for an “acceptable index”.
⁸ Please see p.17 of the Consultation Paper for the specific areas of due diligence required.
⁹ Please see p.17-18 of the Consultation Paper for the non-exhaustive list of disclosure obligations.
¹⁰ Please see p.24 of the Consultation Paper for full list of non-exhaustive factors in determining whether the firm has a meaningful and substantial presence.

The Key Parameters of the Regulatory Regime

A. What to regulate

Having considered the responses received, the HKMA suggested that key activities relating to stablecoins will be subject to a mandatory licensing regime. The HKMA will take a risk-based approach by giving priority to regulating stablecoins that purport to reference to one or more fiat currencies at this stage. The focus of the regulation would be on the purported reference of a stablecoin regardless of their respective underlying stabilisation mechanism. That is, stablecoins that purports to reference to fiat currencies through algorithms or arbitrage mechanisms will be regulated. ²