In June 2017, the Stock Exchange launched a consultation paper on proposals to reform the Growth Enterprise Market (GEM). This was part of a broader review of Hong Kong’s listing regime, with a concept paper launched at the same time proposing the introduction of a new board (please see our 30 June 2017 briefing for further details on the consultation papers).
On 15 December 2017, the Stock Exchange issued its consultation conclusions on both the GEM consultation paper and the concept paper. We will update you on the concept paper conclusions in a separate bulletin. In this bulletin we focus on the GEM consultation conclusionsand the amendments to the GEM regime. Substantially all of the proposals in the consultation paper are being taken forward which will result in GEM no longer being positioned as a stepping stone to a Main Board listing. Rather, GEM will operate as a standalone market for small and mid-sized companies seeking listing. There will also be changes to the Main Board to position it as a premium market for larger companies.
KEY AMENDMENTS TO GEM
Removal of streamlined process for transferring to Main Board
The existing streamlined process for GEM listed companies to migrate to the Main Board will be removed. Under the amended regime, a GEM-listed company seeking to switch to the Main Board will need to appoint a sponsor and produce a listing document meeting the prospectus standard. The sponsor will need to be appointed at least two months prior to the Main Board listing application being filed (consistent with the current regime for sponsors appointed for new listings on both the Main Board and GEM).
However, the qualification requirements for a GEM-listed company meeting the Main Board listing criteria to be able to transfer to the Main Board will remain unchanged. Currently a GEM-listed company must have published one full financial year of financial statements and not have been subject to any disciplinary investigation by the Stock Exchange or any serious or potentially serious breach of the Listing Rules during the previous twelve months. The consultation paper proposed enhancing the requirement by extending these time periods to two full financial years and 24 months respectively. However, this change has not been adopted.
Changes to the listing criteria for GEM companies
The consultation conclusions adopt the recommendations in the consultation paper as regards listing criteria as follows:
Track record requirement – this will remain at two years as currently.
Cash flow requirement – this will be increased to at least HK$30 million in operating cash over the two financial years prior to the issue of the listing document (compared to the existing requirement of at least HK$20 million).
Market capitalisation requirement – the minimum market capitalisation requirement will be increased to HK$150 million at the time of listing (compared to HK$100 million currently).
Public float on listing – with the increase in the market capitalisation requirement, the amount of public float required on listing will increase from HK$30 million to HK$45 million.
Controlling shareholder lock-up – controlling shareholders of GEM companies will be subject to a twelve month lock-up following listing, with a restriction in the subsequent twelve months on any disposals such that they cease to be a controlling shareholder. This extends the two lock up restricted periods from the existing six months periods.
The Stock Exchange is retaining its existing practice of not requiring a GEM listing applicant that can meet the Main Board listing criteria to list on the Main Board instead. This acknowledges that it is a commercial decision by the applicant as to the choice of board and, with the amendments to the GEM regime, regulatory arbitrage between the two boards will now be minimised.
Enhancements to the GEM listing process
The consultation conclusions also adopt the consultation paper recommendations to enhance the listing process with a view to ensuring an open market exists for GEM listings.
Public offering mechanism – Under the revised rules, a mandatory public offer of at least 10% of the total offer size will be required, with allocation between the public and placing tranches and claw back mechanisms equivalent to the existing Main Board regime under Practice Note 18 being introduced. Currently GEM listing applicants can decide the offering structure and whether to include a retail tranche, subject to disclosure in the listing document.
Placing guidelines – the Main Board restrictions on placings set out in the placing guidelines will apply to GEM listings.
Change of name
Given the re-positioning of GEM as a stand-alone board for small and mid-sized issuers, its name will be changed to “GEM” with corresponding changes being made to the GEM listing rules to reflect that it is no longer targeted at emerging companies.