HKEX unveils New Board Concept Paper to attract New Economy Companies

Introduction

An underweight of New Economy companies in the Hong Kong capital market has prompted the Hong Kong Exchanges and Clearing Limited (“HKEX”) to publish a New Board Concept Paper (《創新板框架諮詢文件》) prospecting the creation of a stand-alone New Board. This aims to broaden Hong Kong’s capital market diversity and enable companies with non-standard corporate governance structures to list, in hope that it will vitalise Hong Kong’s global listing appeal and competitiveness.

The New Board Concept Paper

The New Board Concept Paper proposes a New Board divided into two segments:

  • the New Board PREMIUM (創新主板) focuses on companies that are already meeting the Main Board’s listing requirements, but are currently ineligible to list domestically due to their non-standard governance structures, such as certain companies’ weight voting rights (“WVR”) or dual-share characteristics; and
  • the New Board PRO (創新初板) is specifically tailored for professional investors with New Economy companies which are unable to meet the financial or track record requirements of the Main Board and GEM, commonly among start-ups and technology firms.

The below table summarises the key proposals of the New Board Concept Paper:

Proposal for the New Board
Rationale
  • To broaden Hong Kong’s capital market access by opening up a more diverse range of issuers
  • To fill the gaps made by the current listing framework
  • To accommodate pre-profit companies, companies with non-standard governance features and Mainland Chinese companies that wish to secondarily list in Hong Kong
  • Enhance market reputation and quality by segregating the capital market
  • Accommodate WVR structures and increase indexation flexibility
Tentative board mechanisms
  • Accelerated delisting mechanism
  • Presumption that prevailing listing criteria will generally apply
Segments
  New Board PREMIUM New Board PRO
Main characteristics
  • Allows secondary listings by Mainland Chinese companies
  • WVR permitted
  • More stringent regulatory approach
  • Appointing a financial advisor is sufficient, rather than applying the existing sponsor regime
  • For retailers and professional investors
  • Allows secondary listings by Mainland Chinese companies
  • “Lighter touch” approach to initial listing requirements
  • No restrictions on secondary listings
  • WVR permitted (dual-class structures allowed)
  • Existing sponsor regime applies
  • For professional investors only
Listing applicants New Economy companies that meet the Main Board’s financial requirements but have non-standard governance structures For pre-profit/ early stage/ start-ups/ New Economy firms that do not meet the financial or track record criteria for the existing boards and with non-standard governance structures
Eligibility and other listing requirements
  • Financial and track record requirements same as Main Board
  • Minimum public float of 25%
  • Minimum of 300 investors
  • No track record or minimum financial requirements
  • Minimum public float of 25%
  • Minimum of 100 investors
  • Existing suitability guidance set out in Guidance Letters GL68-13 and GL68-13A will not apply
Listing Approval To be approved by the Listing Committee; same as Main Board To be approved by the Listing Department under the authority of the Listing Committee
Offer Document Need to satisfy Prospectus requirements in the Companies (Winding Up and Miscellaneous Provisions) Ordinance and current Main Board requirements No need to satisfy Prospectus requirements.  Only expected to ensure that an accurate and sufficient Listing Document is produced

Consultation Paper on Review of GEM and changes to GEM and Main Board Listing Rules

In light of the proposed framework, a Consultation Paper on Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules (《有關檢討創業板及修訂《創業板規則》及《主板規則》的諮詢文件》) was issued simultaneously to help readjust the current Hong Kong listing regime.

The Main Board will be positioned as a “premier” board, having its minimum market capitalisation requirement raised from HK$200 million to HK$500 million, and a minimum public float value from HK$50 million to HK$125 million.  The Main Board will retain its existing financial and track record criteria.

The GEM will also acquire an increased minimum market capitalisation of HK$100 million to HK$150 million, a public float value increased from HK$30 million to HK$45 million, and a minimum cash flow of HK$30 million in two fiscal years from HK$20 million.  A mandatory public offering mechanism of at least 10 % of its total offer size will also be incorporated.  The Exchange also proposes to remove the GEM’s current treatment as a “stepping stone” to the Main Board and streamline the process for any legible transfers.

Implications

With tech groups such as Alibaba Group Holding Limited and Sea Ltd. (a rebrand of Garena) choosing to list in the U.S., HKEX’s New Board proposal can be seen as its desire to open up greater diversity of issuers as well as an incentive for New Economy companies to list in Hong Kong.

However, a New Board will introduce certain difficult regulatory and administrative complications.  The proposed accelerated delisting mechanism may enable a procedural floodgate due to listing and delisting inflation.  HKEX will also have to ensure that there is sufficient investor protection.  It may also lead a possibility of an overall decrease of issuer quality affecting Hong Kong’s market reputation.

On top of that, there is also still a risk of tier ambiguity.  GEM may be made redundant due to its repositioning as a middle-tier board.  Additional attention should be given to each tier’s demographic in the fear of undesirable overlaps.

Despite the challenges, the New Board proposals, with the help of feedback from various stakeholders and market leaders, could represent an opportunity for Hong Kong to capture the future growth from the New Economy and further consolidate Hong Kong’s position as a  leading international financial centre.  The Exchange aims to finalise detailed New Board listing rules in early 2018, and to publish its conclusions on the GEM
review proposals in late 2017.

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Please contact our Hank Lo, Eric Lui, Cornelia Chu or Rodney Teoh for any enquiries or further information.