PRIMER: Hong Kong’s new listing rules

Author: Karry Lai | Published: 13 Jun 2018
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What are Hong Kong’s new listing rules all about?

The Hong Kong Exchange (HKEx) introduced a new listing regime for pre-revenue biotech companies and so-called new economy companies with weighted voting right (WVR) structures on April 30 2018. Three new chapters have been added to the HKEx’s Main Board listing rules to:

- permit listings of biotech companies that do not meet any of the Main Board’s financial eligibility tests;

- allow listings for companies with WVR structures; and

- create a new concessionary secondary listing route for innovative sector companies that are primary listed on other stock exchanges and want to secondary list in Hong Kong.

Which requirements must biotech companies satisfy?

BiotechBiotech companies that do not meet the financial eligibility tests could list under chapter 18A of the listing rules if they demonstrate eligibility and suitability for listing, have a minimum expected market capitalisation at the time of listing of HK$1.5 billion ($191 million approximately), have a track record of operating its current line of business for at least two financial years prior to listing and have working capital to cover at least 125% of the group’s costs for at least the next 12 months.

Some of the indications of suitability include whether the company has developed a core product beyond the concept stage, whether it has been primarily engaged in R&D for the purposes of developing its core product, if it has registered IP in relation to its core product and whether it has received meaningful third-party investment from at least one sophisticated investor at least six months before the date of the proposed listing.

What requirements must companies with WVR structures satisfy?

Companies with WVR structures looking to list under chapter 8A of the listing rules need to either have a market capitalisation of at least HK$40 billion at the time of listing or have a market capitalisation of at least HK$10 billion at the time of listing and have revenue of at least HK$1 billion for the most recent audited financial year. 

Factors impacting eligibility and suitability include demonstrating a track record of high business growth that is sustainable, contribution of WVR beneficiaries to the growth of the business and whether the business has previously received meaningful third-party investment from at least one sophisticated investor.

What are practical tips businesses looking to list should be mindful of?

According to one market participant at a securities firm, given the requirement for businesses to be innovative, it will be imperative that the prospectus is carefully drafted to clearly set out the nature of the business and explain the innovative features in compliance with the HKEx's guidance letter. The listing application must be able to demonstrate fully the applicant's suitability for listing based on the criteria in the guidance letter. Given the innovative nature of listing applicants with WVRs, the business model may be harder to understand than more traditional businesses. Careful presentation of the company's business and business model in a readily understandable way will be important. 

Listing applicants should take care when structuring any pre-initial public offering (IPO) restructuring to put in place the WVR structure that it does not impact the applicant's ability to satisfy the ownership continuity and control requirements.

Colum Bancroft, managing director at AlixPartners, said that the Securities and Futures Commission (SFC has highlighted the role of sponsors as gatekeepers to the market. Businesses looking to list can expect heightened levels of scrutiny, particularly on issues relating to quality of earnings and assets, corporate governance and viability of future business plans/prospects.

"The HKEx has deliberately avoided setting any bright line tests for this as it wishes to retain flexibility to take into account the specific circumstances"

"Under the new listing rules, companies listing under WVR structures are required to establish a corporate governance committee made up entirely of non-executive directors," he said. "WVR listing candidates should ensure the members of the corporate governance committee are not only independent, and seen to be independent, but also have the requisite level of experience and expertise to perform their role effectively, provide meaningful input, and make objective recommendations to the board."

The SFC’s enforcement priorities and the emphasis on corporate governance in the new listing rules are a reflection of the number of IPO failures in the Hong Kong market in recent years. New candidates for listing can expect greater levels of scrutiny from both their professional advisors and the regulators.

What challenges can be expected?

A number of areas remain unclear and subject to the HKEx’s discretion under the new rules. For instance, listing applicants with WVRs must show characteristics of innovation and growth. Guidance as to innovation is set out in the guidance letter; however, this is subject to the HKEx's ultimate discretion in determining that a company is suitable for listing.

"This will likely pose challenges for businesses in determining whether their business will be viewed favourably by the HKEx," said a market participant. "Further, the guidance letter recognises that what is considered innovative will change over time as technology, markets and industries develop and evolve."

It further suggested that a so-called innovative business model may cease to be so if it is adopted by numerous industry players over time. This will pose challenges for companies where their technology, innovation or business model is similar to that of other listed companies or competitors in demonstrating that they should still be considered innovative.

The guidance letter acknowledges that innovation changes over time and that the HKEx will review the facts and circumstances of each case to determine if innovation has been demonstrated. This creates uncertainty as to the criteria that a listing applicant must satisfy which is challenging from a deal certainty perspective.

"The regime is new and leaves a lot of discretion in the hands of the HKEx to judge suitability," said the market participant. "There have not yet been any test cases or guidance from the HKEX as to why companies have been rejected. Given this subjective judgment by the HKEx built into the regime, there is uncertainty for new applicants seeking a listing under this regime."

There is very little guidance on the requirement to demonstrate a track record of high growth with the high growth trajectory expected to continue. The guidance letter provides that this should be objectively measured by operational metrics, such as business operations, users, customers, unit sales, revenue and profits or market value.

Another area of uncertainty is the requirement for a listing applicant to have received meaningful third party investment. "The HKEx has deliberately avoided setting any bright line tests for this as it wishes to retain flexibility to take into account the specific circumstances," said the market participant.  

WVR listings are only available to those with a market capitalisation of at least HK$40 billion at the time of listing or a market cap of HK$10 billion with revenue in the most recent financial year of at least HK$1 billion. This is a high threshold and, therefore, the regime is only available to larger entities. For companies that are close in size to these thresholds, a careful assessment will be needed of the expected market capitalisation.

Potential applicants may have existing WVR structures that are outside the Hong Kong regime. For instance, they may have non-share based structures that permit enhanced board control. Such companies will need to restructure their control structure to fit within the Hong Kong regime.

See also

HKEx pushes ahead with weighted voting rights

HKEx has work cut out to attract listings