The Hong Kong Stock Exchange has launched a concept paper and a related consultation paper to seek views on reforms to Hong Kong's listing regime. The concept paper proposes establishing a new board (New Board) aimed at attracting a broader range of applicants to list in Hong Kong. The New Board would operate in addition to the existing Main Board and Growth Enterprise Market (GEM). The consultation paper proposes a repositioning of GEM and knock-on amendments to the Main Board. These proposals follow a holistic review of the listing framework in Hong Kong. There is increasing pressure on the Hong Kong Stock Exchange to remain competitive. The listing framework in Hong Kong does not currently permit the listing of pre-profit companies (ie companies operating in "New Economy" industries), those with non-standard governance features and Mainland listed companies who want a secondary listing in Hong Kong. The proposed New Board targets these types of issuers. GEM listings have also been in the spotlight recently with the Stock Exchange and Securities and Futures Commission (SFC) working together to review listing policy and the overall purpose of GEM. See our e-bulletin for details of recent measures by the Stock Exchange and the SFC to try to address the issues facing GEM listings pending regulatory reform. In this briefing we highlight the key proposals from the two papers. CONCEPT PAPER ON THE NEW BOARD The Stock Exchange is proposing a New Board which would have two segments, New Board PRO and New Board PREMIUM. Each segment would target different types of listing applicant and investor and have differing shareholder protection standards based on its risk profile. The Stock Exchange has put forward these proposals but is open to feedback and alternative approaches. 30 JUNE 2017 Hong Kong Table of Contents Concept paper on the New Board 1 Consultation paper on the review of GEM and changes to the GEM and Main Board listing rules 3 Conclusion 5 Contacts 5 RELATED LINKS Herbert Smith Freehills Corporate homepage Corporate Latest Thinking Herbert Smith Freehills Latest Thinking CORPORATE E-BULLETIN HERBERTSMITHFREEHILLS 10/45284411_1 2 Key features of New Board PRO • New Board PRO would target early stage companies who do not meet the financial and track record requirements of the existing GEM or Main boards. Applicants must have a market capitalisation of at least HK$200 million but will not be required to have a track record or meet other minimum financial criteria. On listing, the applicant will be required to have at least 100 investors and a 25% public float. • There would be a "lighter touch" approach to initial listing requirements, with existing suitability concerns, such as reliance on a parent company or connected person or business model sustainability, not being a hurdle to listing. The Stock Exchange is proposing to issue guidance on its approach once it has some practical experience of applying the regime. The applicant will not need to demonstrate equivalent shareholder protection standards to those in Hong Kong. However, the applicant's jurisdiction must satisfy the regulatory cooperation requirement in the Joint Policy Statement issued by the Stock Exchange and SFC in 2013 (JPS). • For New Economy companies, the Stock Exchange is proposing a flexible, principle-based approach to determining the types of entities that would qualify for a New Board PRO listing. The Stock Exchange will develop guidelines, with the Listing Committee having the ultimate decision as to eligibility. The main focus will be on companies in sectors driven by innovation, technology, intellectual property and new commerce. • The Stock Exchange will retain the right to refuse to list a company on New Board PRO if it considers that the applicant could meet the listing requirements of the Main Board, GEM or New Board PREMIUM or if it lacks the characteristics of a New Economy company. • New Board PRO would be restricted to professional investors only, with Exchange Participants tasked with ensuring that their clients seeking to invest in New Board PRO securities meet the professional investor standard in the Securities and Futures Ordinance. • New Board PRO would be open to Mainland listed companies seeking a secondary listing and to companies with weighted voting rights. • Listing applications for New Board PRO would be vetted and approved by the Listing Department, similar to the current arrangement for GEM applicants. • In place of a sponsor, applicants seeking a listing on New Board PRO would need to appoint a financial adviser. The financial adviser would be expected to exercise its own professional judgement in determining the extent of due diligence needed to ensure the listing document meets the required standard. Given the professional-only nature of the New Board PRO, the prospectus regime in the Companies (Winding UP and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO) would not apply. The listing document would be expected to provide accurate information sufficient to enable an informed investment decision to be made. Key features of New Board PREMIUM • New Board PREMIUM would target companies with non-standard governance structures which meet the track record requirements and financial eligibility requirements for the Main Board. The Main Board open market requirements will apply (for example as to public float and spread of shareholders). • The applicant will need to demonstrate equivalent shareholder protection standards to those in Hong Kong under the JPS. However, concessions will be made for companies who are already listed on a recognised US Exchange with a demonstrated good track record. • New Board PREMIUM would be open to both professional and retail investors. • New Board PREMIUM would be open to Mainland listed companies seeking a secondary listing and to companies with weighted voting rights. • Listing applications for New Board PREMIUM would be vetted by the Listing Department and approved by the Listing Committee similar to the current arrangement for Main Board applicants. • The existing sponsor regime will apply to New Board PREMIUM listings. A prospectus will be required meeting the requirements under both CWUMPO and the Main Board Listing Rules. CORPORATE E-BULLETIN HERBERTSMITHFREEHILLS 10/45284411_1 3 Regime for companies with weighted voting rights to list on the New Board The Stock Exchange is seeking views on two approaches to listing applications from companies which have weighted voting rights structures: • One approach relies on disclosure, specifically on the structure and the associated risks and potentially on other matters such as the identities of the persons with weighted voting rights, their voting activities and details of any transfers of weighted voting rights. • The alternative approach is to impose certain mandatory safeguards in addition to the disclosure. The types of safeguards envisaged include restricting the types of persons who can hold weighted voting rights, minimum equity stakes for persons with weighted voting rights and restrictions on transfer. The approach and requirements may differ between the two segments of the New Board. Suspension and delisting from the New Board Both segments of the New Board would be subject to an accelerated delisting procedure aimed at maintaining the quality of the market. Material breaches of the New Board Listing Rules would lead to suspension. For New Board PRO, delisting would follow after 90 days of continuous suspension. The suspension time triggering delisting would be extended to 6 months for New Board PREMIUM. Voluntary withdrawal from either New Board PRO or New Board PREMIUM would be subject to the current requirements of the Main Board. The Stock Exchange is also seeking views on an approach to create a "watchlist" of companies which fail to meet certain quantitative criteria on a continuous basis such as maintaining a share price above a certain threshold. Companies on the watchlist would be delisted after a period of time. No streamlined transfer mechanism between boards The concept paper provides that there will be no streamlined mechanism to transfer between the New Board and the Main Board or GEM. All relevant listing criteria would need to be met, an appropriate listing document prepared and there may also be a requirement to raise additional capital through a public offer. Private market The Stock Exchange also seeks market feedback on the possibility of creating a private market upon which prelisting companies or unlisted companies could register. This would facilitate management of share registers, investor communications and corporate actions and help prepare such companies for eventual listing. There would be no trading facilities and this would purely be a registration only service. CONSULTATION PAPER ON THE REVIEW OF GEM AND CHANGES TO THE GEM AND MAIN BOARD LISTING RULES As mentioned above, GEM listings and GEM-listed companies have been the focus of recent regulatory attention. The consultation paper acknowledges that GEM has not lived up to its original purpose and there are regulatory concerns about its current position as a stepping stone to a Main Board listing. Under the consultation proposals, the existing simplified regime for a GEM company to migrate to the Main Board will be phased out. The listing criteria for GEM will be enhanced, as will the requirements for a Main Board listing. The Main Board will be positioned as a premier board for larger companies and GEM as a stand-alone board to attract small and mid-sized issuers. CORPORATE E-BULLETIN HERBERTSMITHFREEHILLS 10/45284411_1 4 Key proposed amendments to GEM The consultation paper proposes enhancing certain aspects of the listing criteria for GEM companies and enhancing the listing regime: • Track record requirement – this will remain at two years as currently. • Cash flow requirement – the existing requirement of at least HK$20 million would be increased to at least HK$30 million. • Market capitalisation requirement – the existing minimum market capitalisation requirement of HK$100 million at the time of listing would be increased to HK$150 million. • Public float on listing – with the increase in the market capitalisation requirement, the amount of public float required on listing would increase from HK$30 million to HK$45 million. • Controlling shareholder lock-up – currently controlling shareholders of GEM companies are subject to a six month lock-up following listing, with a restriction in the subsequent six months on any disposals such that they cease to be a controlling shareholder. The proposal is to extend each of those six month restricted periods to one year periods. • Public offering mechanism – currently GEM listing applicants can decide the offering structure and whether to include a retail tranche, subject to disclosure in the listing document. The Stock Exchange proposes to introduce a mandatory public offer requirement of at least 10% of the total offer size, with allocation between the public and placing tranches and claw back mechanisms equivalent to the existing Main Board regime under Practice Note 18. • Placing guidelines – the Stock Exchange proposes that the Main Board restrictions on placings set out in the placing guidelines should apply to GEM listings. The existing streamlined process for GEM listed companies to migrate to the Main Board will be removed. If these proposals are implemented, a GEM company seeking to switch to the Main Board will need to appoint a sponsor and produce a listing document meeting the prospectus standard. In addition, the qualification requirements for a GEM-listed company meeting the Main Board listing criteria to be able to transfer to the Main Board are to be enhanced. 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 12 months. The Stock Exchange proposes to extend these time periods to two financial years and 24 months respectively. Key proposed amendments to the Main Board To position the Main Board as a premium market for larger companies, the consultation paper proposes enhancing the listing criteria: • Market capitalisation requirement – the existing minimum market capitalisation requirement of HK$200 million at the time of listing would be increased to HK$500 million. • Public float on listing – with the increase in the market capitalisation requirement, the amount of public float required on listing would increase from HK$50 million to HK$125 million. • Controlling shareholder lock-up – the Stock Exchange is seeking views on whether the lock-up requirements for the Main Board should match those proposed for GEM. Transitional arrangements The Stock Exchange is proposing transitional measures to alleviate the impact of these proposals on existing GEM companies and those in the process of applying for a listing. For existing GEM companies seeking to transfer to the Main Board, the transitional measures would extend for three years from the dated of implementation of the proposals and would enable GEM companies to apply under the existing regime to any migration to the Main Board in that period. For new listing applications submitted before the implementation date, these will also be processed based on the existing GEM and Main Board regimes. CORPORATE E-BULLETIN HERBERTSMITHFREEHILLS 10/45284411_1 5 CONCLUSION Given the proposals will raise the listing criteria for both Main Board and GEM companies, the Stock Exchange acknowledges that there may be an increase in listing applications made over the coming months before any changes are implemented. This may result in delays to listing timetables due to increased vetting time by the regulators. The concept and consultation papers are open for comment until 18 August 2017. With market support, the Stock Exchange has indicated that it would hope to finalise rules for the New Board in early 2018 and release its conclusions on GEM reform in late 2017. This ambitious timetable indicates a willingness for the Stock Exchange to implement reforms to ensure Hong Kong remains a competitive and attractive capital market for companies seeking a listing.