A version of this article was first published on FinanceAsia.
Hong Kong’s stock exchange operator, Hong Kong Exchanges and Clearing (HKEX), has published a consultation paper outlining proposed changes to its listing rules for specialist technology companies.
The new initiative will be a “game-changer” in terms of opening up the Hong Kong market to more types of companies and modernising its listing regime in line with industry and market developments, Hong Kong-based Clifford Chance partner, Virginia Lee, told FinanceAsia.
The new rules – known as Chapter 18C – will apply to companies operating in sectors that are grouped under five categories. These comprise ‘next-generation information technology’, which includes areas such as AI; ‘advanced hardware’, which includes semiconductors; ‘advanced materials’, such as smart glass; ‘new energy and environmental protection’, including storage; and ‘new food and agriculture technologies’.
“The breadth of the tech industries covered by 18C is surprisingly beyond our expectations, in a good way. In particular, the ‘new food and agriculture technologies’ sector, and the clear intention to update the industry and sector list according to market development,” said George Wu, corporate partner at DLA Piper in Hong Kong.
“That said, the proposed market cap thresholds, although largely in line with earlier market news, may be something HKEX will want to reconsider – especially given the current market environment,” he told FA.
The paper outlines a minimum market capitalisation requirement of HK$8 billion ($1.02 billion) for ‘commercial companies’ – i.e., those posting at least HK$250 million in revenue in their most recently audited financial year – and HK$15 billion, for pre-commercial companies.
FA earlier reported that the changes were likely to bring the minimum revenue threshold to between HK$200 million and HK$300 million, compared to the HK$500 million required for applicants not covered by special regimes.
No minimum profit requirements are to be imposed, but the paper does stipulate other requirements:
- Eligible specialist tech firms must demonstrate investment in research and development (R&D) initiatives for a minimum of three financial years prior to listing. This equates to 15% of total operating expenditure for commercial companies and 50%, for pre-commercial companies.
- Additionally, the firms should be recipients of “meaningful investment” from “sophisticated independent investors”. The consultation paper loosely defines these as persons not connected to the listing company, who are responsible for managing assets or funds in excess of HK$15 billion, or HK$5 billion, if derived from specialist technology investments. Alternatively, these investors can constitute a company with “substantial market share” in its particular industry, as supported by independent market or operational data.
The proposed regime “strikes a good balance between increasing access to the market, and risk management, in terms of the in-scope companies and strict eligibility criteria,” observed Lee.
Hong Kong still lags the US and mainland China in terms of companies active in the special technology industries, both by volume and market capitalisation. HKEX’s proposal is set to encourage more innovative and new economy listings – including "homecoming" deals – and will provide more choice for investors active in the market, she explained.
Bringing in the best
In a similar fashion, in 2018, the government lowered profit requirements for biotech firms – a reform known as Chapter 18A. Since then, 53 pre-revenue biotech companies have listed on HKEX, raising approximately HK$115 billion, according to a Clifford Chance briefing paper.
“The market has demonstrated that it can assess the risk profile of such companies critically, and there has been orderly trading of shares, so it’s logical to widen the net to cover pre-commercial special technology companies,” said Lee.
She added that, because the proposed minimum market cap requirement for companies under Chapter 18C company is significantly higher than Chapter 18A ($1.5 billion), it may be that the exchange wants to screen out smaller or less prepared companies.
Meanwhile, Wu thinks that, although Chapter 18A was beneficial to biotech companies, the overall liquidity and valuation of these companies today remains below investor expectation. However, he emphasised that general market conditions should also be taken into account.
“We believe that, to address this, HKEX intends to attract the best companies in each new tech sector (which is why they have proposed higher market capitalisation and valuation requirements). The bourse will then be able to leverage the high quality and market recognition of these tech companies to attract more investors. In turn, this addresses the liquidity and valuation issue, and builds up a more successful ecosystem for this new chapter from the beginning,” he said.
That said, it remains to be seen whether there will be enough tech companies that are able meet the proposed thresholds under the new Chapter 18C, he added.
Wu noted that the highest market capitalisation requirement for pre-revenue companies on the Shanghai Stock Exchange Science and Technology Innovation Board (STAR) market is lower, at RMB4 billion ($548 million; HK$4.3 billion); yet, only 20 companies have listed under this criteria.
As was the case with Chapter 18A, it may take time for the new rules to gain traction, as companies slowly assess the listing rules and prepare to fulfil the listing requirements, Lee concluded. Additionally, local investors will need to become comfortable with the risk profiles of these industries.
“We believe our proposed rules strike the right balance between upholding market quality and creating a commercially viable chapter that meets the fundraising needs of the leading companies of tomorrow,” said HKEX head of listing, Bonnie Chan, in a release announcing the paper.
HKEX CEO, Nicolas Aguzin, added: “We are committed to further elevating Hong Kong’s position as the listing venue of choice for innovative companies from around the world. These new proposals will expand the range of companies that can access Hong Kong’s deep, liquid, international markets and will offer investors even greater choice.”
HKEX is inviting feedback on the proposals by December 18 via a questionnaire on its website.