On 2 February 2018, The Stock Exchange of Hong Kong Limited (the “Exchange”) published two new guidance letters aiming at:
- introducing an optional pricing flexibility mechanism for initial public offerings (“IPO”) – Guidance Letter HKEX-GL90-18; and
- imposing limit and other conditions for the reallocation of shares from the placing tranche to the public subscription tranche in an IPO - Guidance Letter HKEX-GL91-18.
Introduction of IPO pricing flexibility mechanism
Under the current regime, if an IPO listing applicant decides to price the final offer price below the indicative offer price or the bottom end of the indicative offer price range disclosed in its prospectus, a “withdrawal mechanism” will apply. That means, the applicant will be required to (a) issue a supplemental prospectus informing potential investors of, among other things, the changes to the IPO, including the change in the offer price and offer period and the impact of such change on the sufficiency of working capital and use of proceeds; and (b) extend the offer period to allow potential investors to have sufficient time to consider and requires them to confirm their applications under an opt-in approach, that is, to positively confirm their applications for shares in light of the change in the offer price. This withdrawal mechanism is considered cumbersome and leads to delay in the listing timetable.
Guidance Letter HKEX-GL90-18 introduces an optional pricing flexibility mechanism to facilitate the determination of the optimal price for the shares in an IPO without triggering the withdrawal mechanism.
The key features of the pricing flexibility mechanism are:
- listing applicants may price the final offer price up to 10% below the indicative offer price or the bottom end of the indicative offer price range (provided that the range must not be more than 30% above the bottom end of the range) disclosed in the prospectus, without triggering the withdrawal mechanism;
- listing applicants adopting this mechanism are required to comply with certain disclosure requirements in the prospectus, application forms and formal notice on the scope, operation and impact of the price reduction and to make a price reduction announcement on the final adjusted offer price. Suggested disclosure templates are set out in Guidance Letter HKEX-GL90-18; and
- this mechanism will run on a pilot basis and will be reviewed after a 12-month period.
An applicant planning to use the pricing flexibility mechanism should also note the following:
- the Exchange has to be satisfied that the downward adjusted offer price will not affect the applicant’s suitability for listing; and
- the applicant must take into account the reduced proceeds when preparing (a) the forecast memoranda; and (b) the directors’ statement on working capital sufficiency.
Imposition of limit on IPO Placing Tranche Reallocation
Currently, there is no Listing Rule limiting the amount of placing shares that can be reallocated to the public subscription tranche when the placing tranche is undersubscribed or in other circumstances. Paragraph 4.2 of Main Board Practice Note 18 (or paragraph 4 of GEM Practice Note 6 effective from 15 February 2018) has clear provisions for clawback to the public subscription tranche when the oversubscription in the public subscription tranche is 15 times or above (“Clawback Mechanism”), but there is no provision for less than 15 times oversubscription in the public subscription tranche or in other circumstances.
Guidance Letter HKEX-GL91-18 aims to better protect investors who subscribe for shares in an IPO under the public subscription tranche by limiting the extent such investors are allocated shares which are not taken up by institutional and professional investors under the placing tranche for whatever reasons.
The new guidance letter specifies that an IPO listing applicant may only (i) reallocate shares from the placing tranche to the public subscription tranche in an IPO (“Placing Tranche Reallocation”) other than pursuant to the Clawback Mechanism (or a modified clawback mechanism pursuant to a waiver granted by the Exchange (“Modified Clawback Mechanism”)) or (ii) over-allocate shares to the public subscription tranche (“Public Tranche Over-allocation”), subject to the following conditions:
- the maximum number of shares that may be allocated to the public subscription tranche (“Allocation Cap”) following a Placing Tranche Reallocation and a Public Tranche Over-allocation (if any) is the lesser of:
(a) not more than double the initial allocation to the public subscription tranche; and
(b) not more than 30% of the total offered shares;
See below illustrations of the Allocation Cap:
See below application of the Allocation Cap in different scenarios:
- if the IPO includes an offer price range, the final offer price must be fixed at the bottom end of the indicative offer price range or the downward adjusted final price if the pricing flexibility mechanism is used; and
- the applicant must comply with the disclosure requirements set out in Guidance Letter HKEX-GL91-18 for the prospectus, application forms, formal notice and allotment results announcement.
Over-allocation of shares to the placing tranche
Guidance Letter HKEX-GL91-18 also clarifies that over-allocation of shares to the placing tranche is allowed only if the number of shares in the placing tranche available for allocation is insufficient to satisfy the demand in the placing tranche. When determining whether there is excess demand for shares in the placing tranche, no consideration can be given to any excess demand resulting from shares taken up by the lead broker or any distributors; or placed to their connected clients, connected persons and/or existing shareholders of the listing applicant and their respective close associates unless consent has been obtained from the Exchange, but consideration can be given to excess demand resulting from a Placing Tranche Reallocation. For example, if the initial allocation of shares to the placing tranche and the demand in the placing tranche is 90% of the total offer, and a Placing Tranche Reallocation of 10% occurs as allowed under Guidance Letter HKEX-GL91-18, an over-allocation of shares to the placing tranche of 10% is allowed.