Background
On 15 December 2023, The Stock Exchange of Hong Kong Limited (Exchange) published its conclusions (Consultation Conclusions) on the consultation paper to introduce the GEM listing reforms (GEM Listing Reforms) and to request market feedback on proposed changes to the Exchange's Main Board and GEM Listing Rules (Listing Rules).
The GEM Listing Reforms and proposed changes to the Listing Rules will come into effect on 1 January 2024.
A summary of the original consultation proposals can be found in our previous article here.
Market Feedback
The Exchange received 58 non-duplicate responses from the public, of which 76% were made by institutional respondents, and the rest were made by individual respondents. The proposals received general support from the respondents. The Exchange decided to broadly implement the proposals set out in the consultation paper, with some minor modifications and clarifications adopted.
Key Changes to be adopted
New alternative "market capitalisation / revenue / R&D test" for Listing
The Exchange introduced an alternative financial eligibility test for high growth companies with heavy investment in research and development (R&D) activities to list on GEM (market capitalisation / revenue / R&D test). The test enables companies with good growth potential that cannot meet the existing cash flow test due to their investment in R&D to list on the GEM. Details of the financial eligibility test are set out below:-
Track Record
≥ two (2) financial years
Market Capitalisation at Listing
≥ HK$250 million
Revenue
≥HK$100 million in aggregate for the last two (2) audited financial years, with year-on-year growth over the two financial years.
R&D Expenditure
≥HK$30 million in aggregate for the last two (2) financial years, with the R&D expenditure incurred for each of the financial year being at least 15% of it's total operating expenditure for the same period.
Ownership Continuity
Throughout latest full financial year and up until date of listing.
Management Continuity
Throughout latest two (2) full financial years and up until date of listing
One should note that the alternative financial eligibility test applies not only to companies related to technological industries. The Exchange has clarified in the Consultation Conclusions that the test is not confined to any specific industries and any companies with substantial R&D investments may rely on the test, including companies within traditional industries. This echoes the Exchange's goal in providing a fundraising platform for small and/or medium-sized enterprises (SMEs).
Post-IPO Lock-up on Controlling Shareholders
The Exchange reduced the existing post-IPO 24 months lock-up period 1 imposed on controlling shareholders of GEM issuers as follows:-
First six months: Controlling shareholder(s) of an issuer is/are restricted from disposing of any shares of the issuer within the first six months after listing.
Second six months: Controlling shareholder(s) of an issuer is/are restricted from disposing of any shares within the second six months after listing that would result in them ceasing to be controlling shareholder(s).
The reduction in lock-up period was in line with the Main Board requirements and was made as a result of the dwindling of shell activities. With the current Listing Rules and guidance on reverse takeover and sufficiency of operations and a robust delisting regime be in place, the Exchange considers that the risk of reoccurrence of shell activities is mitigated.
The Exchange considers that the new 12 months post-IPO lock-up period is already sufficient to strike a balance between the protection of the interest of the issuers and investors while at the same time allowing greater flexibility for companies to conduct post-IPO fundraising for future expansions. The lessened restriction could also help increase liquidity of the GEM by making available more shares to be traded in the market.
Continuing Obligations
The continuing obligations of GEM issuers have been widely considered by market participants to be unduly rigid, which discouraged the GEM issuers from pursuing healthy business growth. In view of the above, the Exchange in the Consultation Conclusions amended the continuing obligations of GEM issuers and brought them in line with those of Main Board issuers, which are as follows:-
Appointment of Compliance Officer and Compliance Adviser
- GEM issuers are no longer required to appoint one executive director as a compliance officer
- GEM issuers are now required only to appoint and retain a compliance officer until publication of financial results for the first full financial year after listing
- Compliance officers' responsibilities that only applied to GEM issuers (e.g. (i) due diligence on listing documents published, and dealing with the Exchange, with respect to certain transactions during it's period of engagement, and (iii) disclosure of interests of compliance adviser for the aforesaid purpose) are now removed.
Periodic Reporting
- Quarterly reporting is now made a recommended best practice under the GEM's Corporate Governance Code
- GEM issuers' reporting obligations are now in line with that of Main Board Issuers. GEM issuers are required to publish:
- annual reports not later than four (4) months;
- interim reports not later than three (3) months;
- preliminary announcements of results for the first six (6) months of each financial year not later than two (2) months after the date upon with the financial period ended.
Streamline Transfer Mechanism to Main Board
On top of the existing Chapter 9A transfer mechanism, the Exchange introduced a new streamline transfer mechanism for GEM issuers to transfer their listings to the Main Board under Chapter 9B of the Listing Rules. As shown in the Consultation Conclusions, 97% of the respondents supported the adoption of the proposal. Many perceive that the existing transfer mechanism, especially in relation to the appointment of sponsor and the "prospectus-standard" listing document requirements, as unduly stringent and cost inefficient. It is believed that with the new streamlined transfer mechanism, issuers will be incentivised to list on the GEM rather than on the Main Board directly.
The requirements are set out below:-
Main Board Qualifications
Meet all qualifications for listing on the Main Board
Track Record
Must have complied with the Exchange’s requirements in respect of its financial results for three (3) full financial years as a GEM issuer prior to its transfer, with (i) ownership continuity and control, and (ii) no fundamental change in its principal business, throughout that period.
Daily Turnover
Value of shares traded on a trading day must have reached a minimum turnover threshold of HK$50,000 on ≥50% of the trading days over the 250 trading days immediately preceding the transfer application and until the commencement of dealings in its securities on the Main Board (Reference Period)
Volume Weighted Average Market Capitalisation
Must meet minimum market capitalisation requirement for listing on the Main Board based on the applicable threshold over the Reference Period.
Compliance Record
Have not been held to have committed a serious breach of any Listing Rules in the 12 months preceding the transfer application until the commencement of dealings in its securities on the Main Board, or subject to any investigation by the Exchange or any ongoing disciplinary proceedings under Chapter 3 of the GEM Listing Rules or Chapter 2A of the Main Board Listing Rules, in relation to a serious breach or potentially serious breach of, any Listing Rules as at the date of the transfer application and the date when dealing in its securities commences on the Main Board.
Appointment of Sponsor
Nil
Preparation of “Prospectus Standard” Listing Document
Nil. However, a streamlined transfer applicant is required to publish an announcement as soon as practicable before the intended date that the dealings in the issuer’s shares on the Main Board are expected to commence. The announcement will be pre-vetted by the Listing Division.
Cost for Transfers of Listing
Main Board initial listing fee is exempted for transfer applicants.
Conclusion
Following the implementation of the GEM Listing Reforms, the Exchange believes that the GEM will be better positioned as a market designated for both well-established SMEs and growth companies with substantial investment in R&D, as well as a platform for supporting the development of green and sustainable finance. The GEM is also anticipated to be a market suitable for trading by all types of investors, whether individual or institutional.
1 Pursuant to the existing post-IPO lock-up period, a GEM issuer's controlling shareholder(s) is/are restricted from disposing of any shares (i) within the first 12 months after listing, and (ii) within the second 12 months after listing, where such disposal of shares would result in them ceasing to be the controlling shareholder(s).
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