SFC and HKEX Temporarily Modify Rules for STC and De-SPACs

Background

On 23 August 2024, the Securities and Futures Commission (SFC) and The Stock Exchange of Hong Kong Limited (Exchange) released a joint announcement on temporary modifications (Modifications) to the Main Board Listing Rules relating to the listing of Specialist Technology Companies ¹ and De-SPAC Transactions².

The Modifications will apply temporarily for three years from 1 September 2024 to 31 August 2027. The Exchange may review the requirements and conduct public consultation, if necessary.

Key changes to be adopted

The Modifications include updates to expand eligibility and ease listing requirements for Specialist Technology Companies, and amendments to the requirements in relation to independent third party investment for De-SPAC Transactions.

1. Reduction in minimum initial market capitalisation requirement for listing of Specialist Technology Companies

Having considered the recent market conditions, the Exchange believes that a reduction in the initial market capitalisation threshold will provide a more viable listing pathway for Special Technology Companies.

The minimum initial market capitalisation required for Specialist Technology Companies to be listed will be reduced:

• from HK$6 billion to HK$4 billion for Specialist Technology Companies that have revenue of at least HK$250 million for their most recent audited financial year (Commercial Companies); and

• from HK$10 billion to HK$8 billion for Specialist Technology Companies that do not have revenue of at least HK$250 million for their most recent audited financial year (Pre-Commercial Companies).

The HK$4 billion threshold for Commercial Companies and the HK$8 billion threshold for Pre-Commercial Companies were the most commonly suggested alternative minimum market capitalisation thresholds by the respondents to the consultation conclusions on the listing regime for Specialist Technology Companies published by the Exchange on 24 March 2023.

The reduced threshold for Commercial Companies will be the same as the market capitalisation requirement under the existing market capitalisation / revenue test set out under Rule 8.05(3) of the Main Board Listing Rules. We expect more Specialist Technology Companies to be eligible for Chapter 18C listing after the minimum initial market capitalisation is reduced.

2. Reduction in minimum independent third party investment for De-SPAC Transactions

The minimum independent third party investment required to have been committed by the time of the announcement of a De-SPAC Transaction will be modified to the lower of:

• the currently prescribed percentage of the negotiated value of the de-SPAC target as set out in Rule 18B.41 of the Main Board Listing Rules, or

• HK$500 million in value.

On 1 January 2022, the Exchange introduced Chapter 18B of the Main Board Listing Rules on SPAC. As of 30 August 2024, five SPACs have successfully listed on the Main Board, among which three SPACs have announced De-SPAC Transactions.

The independent third party investment threshold serves as an important safeguard to provide support for the valuation of a de-SPAC target. We expect the new minimum independent third party investment requirement will continue to ensure that there is support for the valuation of the de-SPAC target in a De-SPAC Transaction.

3. Modifications on independence requirements for third party investors

The independence test for third party investors in a De-SPAC Transaction will be aligned with the independence test for sophisticated independent investors in Specialist Technology Companies, such that:

• the independence of a third party investor will be determined as at the date of the signing of the definitive agreement for the relevant investment in the De-SPAC Transaction, and up to listing of the listed issuer resulting from the completion of such De-SPAC Transaction;

• to be considered as independent, the investor must not be:

• a core connected person of the SPAC or the de-SPAC target, except for any substantial shareholder of the SPAC or the de-SPAC target that is considered a core connected person only because of the size of its shareholding in the SPAC or the de-SPAC target, subject to the sub-paragraph below;

• controlling shareholder (or any person within the group of persons who are considered as controlling shareholders) of the SPAC or the de-SPAC target; or

• a founder of the de-SPAC target and their respective close associates; and

• the Exchange retains the discretion to deem any other person to be not independent based on the facts and circumstances of an individual case.

In tandem with the Modifications, the Exchange has also amended its guidance materials to modify the definition of "sophisticated investor" for independent third party investment in a De-SPAC Transaction. The Exchange will assess whether an investor is sophisticated on a case-by-case basis, by reference to its relevant investment experience, and its knowledge and expertise in the relevant field of the de-SPAC target, which could be demonstrated by its net assets, assets under management (AUM), size of its investment portfolio or track record of investments, where applicable. The Exchange will generally consider institutional investors with AUM of at least HK$8 billion as sophisticated.

Time limit for the Modifications

The Modifications will apply for a period of three years from 1 September 2024 to 31 August 2027.

The reduced initial market capitalisation threshold will apply to all Specialist Technology Companies if their expected date of listing is on or after 1 September 2024 and the relevant listing applications are submitted on or before 31 August 2027.

The Modifications which relate to De-SPAC Transactions will apply to all De-SPAC Transactions that are expected to be announced during the three-year implementation period.

Conclusion

The Modifications demonstrate the commitment of the Exchange and the SFC to enhance the attractiveness and competitiveness of Hong Kong's capital market amidst changing market conditions. By expanding eligibility and easing listing requirements for Specialist Technology Companies, the regulators jointly create a more inclusive and dynamic environment for cutting-edge enterprises.

While these Modifications are temporary, the Exchange has indicated possibility of future review. It therefore remains to be seen whether these Modifications will become permanent after the three-year implementation period.

¹ A "Specialist Technology Company" is a company primarily engaged in the research and development of, and the commercialisation and/or sales of, products and/or services that apply science and/or technology within an acceptable sector of any of the specialist technology industries as set out in Chapter 2.5 of the Guide for New Listing Applicants published by the Exchange.

² "De-SPAC Transaction" refers to an acquisition of, or a business combination with, a business (de-SPAC target) by a special purpose acquisition company (SPAC), which is a shell company that raises funds through its listing for the purpose of conducting a De-SPAC Transaction at a later stage within a pre-defined time period after listing resulting in the listing of the "Successor Company".