Introduction
On 15 December 2023, The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) published conclusions (the “Consultation Conclusions”) to its consultation paper on GEM Reforms (the “Consultation Paper”).
During the consultation period which ended on 6 November 2023, the Hong Kong Stock Exchange received 58 responses in total. After considering the comments made by the respondents, the Hong Kong Stock Exchange has adopted all the proposals in the Consultation Paper with minor adjustments and clarifications. For more details of the proposed GEM listing reforms, please refer to our news update on the Consultation Paper. The said proposals came into effect on 1 January 2024.
The Hong Kong Stock Exchange has marked several modifications and clarifications to its original proposals in Chapter 2 of the Consultation Conclusions, which the conclusions are summarised below:
Initial Listing Requirements
New Alternative Eligibility Test
The Hong Kong Stock Exchange proposed a new financial eligibility test (the “market capitalisation / revenue / R&D test”) to attract high-growth enterprises heavily involved in R&D. Concerns were raised about its effectiveness in attracting new GEM listings and favouring technology industries over traditional ones. The Hong Kong Stock Exchange clarified that the market capitalisation / revenue / R&D test is open to companies from all industries with substantial R&D investment, therefore, small and/or medium-sized enterprises (“SMEs”) in traditional industries can still list on GEM if they meet cash flow test thresholds. The Hong Kong Stock Exchange will monitor the market capitalisation / revenue / R&D test’s effectiveness and make adjustments if needed.
Reduction of Post-IPO Lock-up Period for Controlling Shareholders
Regarding the post-IPO lock-up period for controlling shareholders of GEM issuers, the proposed duration was reduced from 24 to 12 months. While there are concerns about operational instability and shell activities, the Hong Kong Stock Exchange considers them adequately addressed by emphasising existing rules and guidance on reverse takeovers and the delisting regime. As such, the 12-month lock-up period is considered sufficient to balance the interests of investors and post-IPO fundraising flexibility of the GEM issuers.
Existing Eligibility Requirements
Though not mentioned in the Consultation Paper, some respondents suggested lowering the minimum market capitalisation of HK$150 million and cash flow requirement of HK$30 million for GEM listing. However, the Hong Kong Stock Exchange decided to maintain the existing requirements, commenting that the current minimum market capitalisation is already lower comparing to peer markets and that operating activities which generate a reasonable level of cash flow are more likely to indicate business sustainability.
Continuing Obligations
Compliance Officer and Compliance Adviser
The Hong Kong Stock Exchange removed the requirement for an executive director of a GEM issuer to serve as the compliance officer, with the view that the board of directors collectively holds responsibility for compliance, making the role of compliance officer unnecessary. To ease the financial burden of GEM issuers and further align with the rules applicable to Main Board issuers, the engagement period for compliance advisers is also shortened so that it ends on the date on which the GEM issuer publishes its financial results for the first full financial year commencing after the date of its initial listing.
Periodic Reporting Requirements
As to the removal of mandatory quarterly financial reporting for GEM issuers, while some respondents preferred retaining quarterly reporting to enhance transparency, the Hong Kong Stock Exchange believed that removing the requirement (and only keeping it as a recommended practice) would reduce compliance costs for GEM issuers. Respondents unanimously supported aligning financial reporting timeframes of GEM issuers with those of the Main Board, as both markets adhere to the same accounting standards and report preparation process. A respondent suggested amending the guidance letter HKEX-GL25-11 to reflect the change in publication timeframes, which the Hong Kong Stock Exchange agreed to.
Transfers to the Main Board
New Streamlined Transfer Mechanism
In the Consultation Paper, the Hong Kong Stock Exchange planned to introduce a streamlined mechanism for qualified GEM issuers to transfer their listings to the Main Board. An overwhelming proportion of respondents supported this proposal, believing that the streamlined transfer mechanism will enhance accessibility and efficiency, eliminate the need for a redundant “prospectus-standard” listing document, and save time and costs by removing the requirement for sponsor appointment. Considering the majority support, the Hong Kong Stock Exchange has adopted this proposal.
Track Record Requirements
As part of the streamlined transfer process, applicants are required to demonstrate a minimum track record of ownership continuity and control, as well as of no significant changes in their principal business for three full financial years as a GEM listed issuer before the transfer. Some respondents considered the three-year period to be too long and proposed shortening it to one or two years. However, the Hong Kong Stock Exchange believed the three-year compliance record is necessary to justify the streamlined transfer arrangements, while decided to retain the existing transfer mechanism alongside the new streamlined transfer mechanism. The existing mechanism requires a transferee to demonstrate a one-year pre-transfer track record period after GEM listing. In other words, GEM issuers can choose the existing transfer route over the streamlined mechanism for a quicker transfer if the benefits outweigh the costs associated with sponsor due diligence and the production of a “prospectus-standard” listing document.
Liquidity and Valuation Requirements
Transfer applicants must also meet certain liquidity and valuation criteria, including the Daily Turnover Test and the Volume Weighted Average Market Capitalisation Test as described in the Consultation Paper. Supporting respondents considered that a daily turnover requirement could reflect adequate investor demand in the GEM issuer’s securities, and the minimum daily turnover threshold is set at HK$50,000. Regarding the Volume Weighted Average Market Capitalisation Test, for the purpose of assisting issuers and market practitioners, the Hong Kong Stock Exchange will further provide illustrative examples to explain how to calculate the volume weighted average market capitalisation of an issuer.
Compliance Record Requirement
The Hong Kong Stock Exchange has introduced a compliance record requirement for streamlined transfers. This means that transfer applicants must not have committed a serious breach or be the subject of an investigation or ongoing disciplinary proceedings related to a serious or potentially serious breach of the Listing Rules. Some raised concerns about the presumption of innocence and the potential disruption and costs associated with cancelling a transfer application if an applicant is only made aware of an investigation at the time of application. In response, the Hong Kong Stock Exchange again emphasised the importance of a clean compliance record to mitigate the risk of disciplinary action or serious breaches after the GEM issuer being transferred to the Main Board.
Costs for Transfers of Listing
The proposal of exempting GEM transferees from the Main Board initial listing fee received widespread support, as it reduces the cost of transferring from GEM to the Main Board and incentivise qualified companies to choose the streamlined transfer mechanism.
Analysis and takeaways
The lack of GEM listings in recent years has underscored the need for reforms to enhance its competitiveness. By reintroducing the streamlined transfer mechanism with modifications and clarifications in the Consultation Conclusions, GEM listing reforms may attract SMEs from Hong Kong and the Greater Bay Area that are seeking a listing, and reduce compliance costs for current GEM issuers while maintaining market quality and protection to investors.
Effectiveness of the reforms in restoring vitality to the GEM market is yet to unfold. Hopefully, the GEM reforms will pave the way for a more conducive environment to SMEs, new listings, and a more vibrant 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.