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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.
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