On 16 June 2016, Hong Kong Exchanges and Clearing Limited (“HKEX”) and its subsidiary The Stock Exchange of Hong Kong Limited (the “Exchange”) announced that they will be looking for public feedback on their proposals to broaden capital market access in Hong Kong and strengthen Hong Kong’s listing regime. They seek input on two separate papers:

  1. the New Board Concept Paper; and
  2. the Consultation Paper on the Review of the Growth Enterprise Market (“GEM”) and Changes to the GEM and Main Board Listing Rules (the “Consultation Paper”).

In essence, the Consultation Paper shows that the Exchange wants to continue to strengthen its current regime and ensure that listing rules reflect currently acceptable market standards. It also seems to be an attempt to address recent regulatory and market concerns about listing applicants and listed issuers.

In this article, we will provide a quick synopsis of the key changes to the basic listing requirements of the GEM and Main Board, and an idea of where the proposed changes could have most impact (highlighted in red).

Key proposed changes to listing requirements

The most important parts of the proposed changes under the GEM and Main Board are highlighted in red below:

Table 1

Listing requirement

Main Board

GEM Board

Financial Requirements

A trading record of not less than three financial years fulfilling one of the three financial criteria, namely:

  • the profit test;
  • the market cap / revenue test; and
  • the market cap / revenue / cashflow test

A trading record of not less than two financial years comprising:

  • a positive cashflow generated from operating activities in the ordinary and usual course of business of at least HK$20 million HK$30 million in aggregate for the two financial years immediately preceding the issue of the listing document

Accounting Standards

  • A new applicant's accounts must be prepared in accordance with Hong Kong Financial Reporting Standards, International Financial Reporting Standards or China Accounting Standards for Business Enterprises (PRC issuer only)
  • Banking companies must also comply with the Financial Disclosure by Locally Incorporated Authorised Institutions issued by the Hong Kong Monetary Authority

Suitability for Listing

Both the issuer and its business must, in the opinion of the Exchange, be suitable for listing

Operating History and Management

Trading record period of at least three financial years with:

  • management continuity for at least the three preceding financial years; and
  • ownership continuity and control for at least the most recent audited financial year

Trading record of at least two full financial years with:

  • substantially the same management throughout the two financial years; and
  • a continuity of ownership and control throughout the full financial year immediately preceding the issue of the listing document

Minimum Market Capitalisation

HK$200 million HK$500 million

HK$100 million HK$150 million

Public Float (25%)

HK$50 million HK$125 million

HK$30 million HK$45 million

Spread of Shareholders

Must be held among at least 300 holders

Must be held among at least 100 persons

Post-IPO Lock-up period on controlling shareholders

  • Controlling shareholders cannot sell shares for the first six monthsyear upon listing
  • For the next six months year, controlling shareholders may sell shares but should retain control

Offering Mechanism

  • A new applicant may not list by way of placing only if there is likely to be significant public demand for its securities
  • The Main Board Listing Rules set out certain procedures to be adopted in the allocation of shares in initial public offering – see Practice Note 18 of the Main Board Listing Rules

Free to decide the offering mechanism provided full disclosure is made in the listing document (100% placing allowed) Mandatory public offering of at least 10% of the total offer size and the allocation of offer shares between the public and placing trances and the claw back mechanism to be consistent with those in Practice Note 18 to the Main Board Rules

New Issue Price

New shares cannot be issued at a price below their nominal value

Transfer mechanism

  • No sponsor is required A sponsor must be appointed
  • Transfer announcement “Prospectus-standard” listing document

Admission requirements for GEM transfers to the Main Board

  • Must have published at least onetwo full years of financial statements after GEM listing
  • No disciplinary investigations for serious or potentially serious breaches 1224months before transfer

Ability to meet Main Board admission requirements

No requirement for a GEM applicant that can meet the Main Board admission requirements to list on the Main Board instead of GEM

Proposed transitional arrangements during transitional period

The table below shows a summary of the transitional arrangements during the three year transitional period, if the GEM review proposals are adopted:

Table 2

Transitional period (three years from the amendment effective date)

GEM listing applicants

Applications will be processed and eligibility assessed under revised GEM Listing Rules

GEM transfer applicants

GEM Transfer applications by (i) issuers listed on GEM and (ii) GEM applicants who have submitted a valid listing application and successfully listed (with only one refreshment of application allowed) as at the date of the Consultation Paper (together, the “Eligible Issuers”) who have not changed controlling shareholder/principal business:

  • required to publish a GEM transfer announcement with key disclosures;
  • required to appoint sponsor to conduct due diligence for the last financial year and up to announcement date; and
  • eligibility assessed under the Main Board Listing Rules in force as at the date of the GEM consultation paper

GEM Transfer applications by Eligible Issuers who changed controlling shareholder/principal business:

  • required to publish a “prospectus standard” listing document; appoint a sponsor to conduct due diligence as if the application is a new listing; and
  • eligibility assessed under the Main Board Listing Rules in force as at the date of the GEM consultation paper

GEM Transfer applications from non-Eligible Issuers will be processed and eligibility assessed under the revised Main Board Listing Rules

 

Main Board listing applicants

Applications will be processed and eligibility assessed under revised Main Board Listing Rules

Potential impact of the proposed changes

1. Targeting of shell companies.

One key group to be affected by the proposed changes is cash companies, or more widely known as shell companies, which are not regarded by the Exchange as suitable for listing.

The Exchange is looking to address the current ambiguity around control measures in relation to shell companies. To achieve this, the Exchange hopes to add to the measures to tackle issues of market manipulation, insider trading and unnecessary volatility in the market post-listing.

The Exchange, via the proposed new measures, emphasises increasing the post-IPO lock-up period for controlling shareholders of listed companies on both GEM and the Main Board by requiring controlling shareholders to remain control of shares for at least two years upon listing. The Exchange likely foresees that, by introducing a longer lock-up period, any commercial incentive to create shell companies will be reduced, and any related issues could be tackled more effectively.

2. GEM will no longer be an easy “stepping stone” to the Main Board.

The Exchange’s proposals are highlighted by the removal of the streamlined process for GEM transfers to the Main Board, along with the tightened requirements in relation to several admission and transfer thresholds. Such changes would result in the general entrance thresholds of the two markets being raised. As a result, it will be made more difficult for potential applicants to enter GEM and the window of opportunity for treating GEM as a “stepping stone” to the Main Board will be greatly narrowed.

However, it is noted that, under the proposed transitional agreements, Eligible Issuers would enjoy a relatively lengthy (three years) transitional period. During this time, these companies would still be required to appoint a sponsor to conduct due diligence. They will only be subject to an eligibility assessment under the Main Board Listing Rules in force as at the date of the Consultation Paper, though they might not be required to publish a “prospectus standard” listing document. As a result, Eligible Issuers and their stakeholders would enjoy a greater degree of flexibility and a better safeguard of their interests.

3. Practical considerations.

Despite these transitional arrangements, we believe the Exchange will still keep a close eye on Eligible Issuers and listing applicants who wish to “catch the last bus” and may place them under a watch list. As a result, we should pay special attention to the proposed changes, especially the minimum market capitalisation, in order to avoid facing any scrutiny from the Exchange.