HKEX proposes regime for listing Specialist Technology Companies

Background

On 19 October 2022, The Stock Exchange of Hong Kong Limited (Exchange) published a consultation paper proposing to amend the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules) to enable the listing of companies in certain specialist technology industries on the Main Board of the Exchange (Proposed Amendments).

The Proposed Amendments, if effected, would represent a significant exemption for such qualifying specialist technology industry companies to the profit requirement for listing on the Main Board which was increased on 1 January 2022. The consultation period will end on 18 December 2022.

Key Features of the Proposal

Definition of Specialist Technology Companies

Companies in certain high-growth sectors (referred to as Specialist Technology Companies and Specialist Technology Industries respectively) not currently eligible for listing on the Main Board may benefit from the Proposed Amendments:

The Exchange has indicated that the list of Specialist Technology Industries is non-exhaustive and may be updated from time to time.

Categorisation of Commercial / Pre-Commercial Companies

The Exchange proposes to use the Commercialisation Revenue Threshold (as defined below) as a bright line test to distinguish companies that have commercialised their products and/or services applying Specialist Technology (Specialist Technology Products) and have generated meaningful revenue (Commercial Companies), and companies that are primarily engaged in research and development (R&D) and are raising funds to further their R&D to commercialise their Specialist Technology Products and/or have not yet generated meaningful revenue (Pre-Commercial Companies).

The revenue threshold in the Proposed Amendments is HK$250 million minimum for the most recent audited financial year (Commercialisation Revenue Threshold). Only revenue arising from a Specialist Technology Company’s relevant business segment(s) would be counted.

When a Specialist Technology Company does not pass the Commercialisation Revenue Threshold, it would be classified as a Pre-Commercial Company and be subject to more stringent listing requirements as described below.

Qualifications for Listing

The table below summarises the proposed qualifications for listing applicable to Commercial Companies and Pre-Commercial Companies respectively:

Sophisticated Independent Investor

In light of the difficulty in valuing Specialist Technology Companies, the Exchange proposes that the Specialist Technology Company must have received meaningful investment from investors who are not core connected persons of the Specialist Technology Company seeking to list (excluding a person who is regarded as a core connected person only because of the size of his or her shareholding in the Specialist Technology Company), and are determined by the Exchange as sophisticated investors (Sophisticated Independent Investors).

The Exchange would assess whether an investor is “sophisticated” on a case-by-case basis. Some examples of the types of “sophisticated” investor were given by the Exchange for illustrative purpose:

• an asset management firm with assets under management (AUM) of, or a fund with a fund size of, at least HK$15 billion;
• a company having a diverse investment portfolio size of at least HK$15 billion;
• an investor of any of the types above with an AUM, fund size or investment portfolio size (as applicable) of at least HK$5 billion where that value is derived primarily from Specialist Technology investments; and
• a key participant in the relevant upstream or downstream industry with substantial market share and size, as supported by appropriate independent market or operational data.

IPO Requirements

More Robust Price Discovery Process

Given the inherent difficulties in valuing Specialist Technology Companies, the Exchange proposes that the Specialist Technology Companies must ensure that at least 50% of the total number of shares offered in the Initial Public Offering (IPO) (excluding any shares to be issued pursuant to the exercise of any over-allotment option) must be taken up by independent institutional investors who participate in the placing tranche of an IPO, excluding existing shareholders and any of their close associates and core connected persons of the Specialist Technology Company and are falling within the definition of “professional investor” in Section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571), to ensure a robust price discovery process.

The table below shows the comparison between the initial allocation and clawback mechanism under Practice Note 18 (PN 18) and the proposed initial allocation and clawback mechanism specific to Specialist Technology Companies:

Free Float Requirement and Offer Size

The Exchange proposes that a Specialist Technology Company must have at least HK$600 million of the market capitalisation at listing to be free from any disposal restrictions, contractual or otherwise. The listing of a Specialist Technology Company is also expected to be of a meaningful size for both public and placing tranches of the IPO, and the Exchange reserves the right not to approve the listing if it believes the offer size to be not significant enough to facilitate post-listing liquidity, or may otherwise give rise to orderly market concerns.

IPO Disclosure Requirements

The Exchange proposes that a Specialist Technology Company has to disclose additional information, including (i) pre-IPO investments and cash flow-related disclosures; (ii) products and commercialisation status and prospects; (iii) R&D activities and experience; (iv) industry-specific information including details of any industry-specific standards, definitions or classifications; (v) material intellectual property; and (vi) warning statements specific to Specialist Technology Companies.

If the Specialist Technology Company is a Pre-Commercial Company, the Exchange proposes that it must also make disclosures including: (i) the stage of R&D for each of its Special Technology Product(s); (ii) development details by key stages and milestones for its Specialist Technology Product(s) to achieving the Commercialisation Revenue Threshold; (iii) all relevant risks associated with the commercialisation of each of its Specialist Technology Product(s); and (iv) additional warning statement specific to Pre-Commercial Companies.

Post-IPO Requirements

Post-IPO Lock-ups on Existing Shareholders

The Exchange also makes distinctions between Commercial Companies and Pre-Commercial Companies in terms of the durations of post-IPO lock-up periods applicable to different individuals or entities and their close associates (where applicable), imposing more stringent requirements on the Pre-Commercial Companies, as summarised in the table below:

Key Persons

Founders, beneficiaries of weighted voting rights, executive directors and senior management, key personnel responsible for the Specialist Technology Company’s technical operations and/or the R&D of its Specialist Technology Product(s) whose expertise is primarily relied upon by the company for the development of its Specialist Technology Product(s) and lead developer(s) of the core technologies in relation to the Specialist Technology Product(s) are regarded as Key Persons under the Proposed Amendments. The Exchange reserves the right to deem any person to be a Key Person based on the facts and circumstances of each case.

Pathfinder SIIs

Pathfinder SIIs refers to Sophisticated Independent Investors who have invested at least 12 months before the date of the listing application, each holding such amount of shares or securities convertible into shares equivalent to 5% or more of the issued share capital of the listing applicant as at the date of the listing application and throughout the pre-application 12-month period.

Additional Continuing Obligations for Pre-Commercial Companies

The Exchange proposes the requirement for interim and annual reports of a Pre-Commercial Company to include details of its R&D activities and commercialisation progress during the period under review, including:

• details of the development progress of its Specialist Technology Product(s) under development;
• the timeframe for, and any progress made towards, achieving the Commercialisation Revenue Threshold;
• updates on any revenue, profit and other business and financial estimates as provided in the listing document;
• a summary of its R&D investment during the relevant period; and
• a prominent warning statement that the Commercialisation Revenue Threshold may not be achieved.

In addition, Pre-Commercial Companies are proposed to be subject to the same obligations as biotech companies listed on the Exchange under Chapter 18A of the Listing Rules, which include having a period of 12 months (as opposed to 18 months for other issuers) to re-comply with the continuing obligation to maintain sufficient operation or assets before delisting.

Conclusion

The Exchange believes that the Proposed Amendments will improve the attractiveness of Hong Kong as a listing venue for new economy companies and drive growth in talent and investment across high-growth frontier industries in the region and beyond. The announcement of the Proposed Amendments also coincided with the date of the 2022 Policy Address by the Chief Executive of Hong Kong, which placed emphasis on developing emerging industries and promoting industries through promotion of innovation and technology development and facilitation of commercialisation of research and development outcomes.

It is hoped that the consultation would help import objectivity and clarity to the design of a listing regime which caters for the unique features of Specialist Technology Companies, while establishing a commercially viable framework for issuers and ensuring market quality for the investing public.