In June 2017, Hong Kong Exchanges and Clearing Limited and its subsidiary The Stock Exchange of Hong Kong Limited (the “HKEx”)1 launched a consultation to seek public feedback on a set of proposals contained in two separate papers: (i) the New Board Concept Paper2 and (ii) the Consultation Paper on Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules3 (the “GEM Review Consultation Paper”). The proposals are aimed at allowing access to capital markets in Hong Kong to a more diverse range of issuers, improving quality of the HKEx’s markets and enhancing Hong Kong’s competitiveness as a global financial center. In this eUpdate, we focus on the key proposals contained in the GEM Review Consultation Paper. We discussed the key proposals contained in the New Board Concept Paper in our separate eUpdate here. While the proposals are in the separate papers, they are interlinked and should be viewed holistically.
In Part 1 of this eUpdate series, we discussed the joint consultation paper issued in June 2016 by the Securities and Futures Commission (the “SFC”) and the HKEx in which they proposed to change the current listing regulatory regime in Hong Kong by creating two new committees: the Listing Policy Committee and the Listing Regulatory Committee, both of which would include representatives of the SFC (currently, the SFC is not directly involved in the discussion of listing applications or listing policies but has veto power to reject any application or listing policy).
Reasons for review of and changes to the current listing rules
Proposed changes seek to ensure that the listing rules in Hong Kong reflect currently acceptable standards in the market and address the recent market and regulatory concerns regarding the quality and performance of GEM applicants and listed issuers. These concerns include high concentration of shareholders, illiquid shares, post-initial public offering (IPO) volatility, creation of “shell” companies and possible exploitation of GEM as a means of achieving a Main Board listing. There have also been comments that there is a need to ensure that each market segment of the Hong Kong listing regime has a distinct identity to cater to companies at different stages of development.4
“We are proposing changes to the GEM and Main Board Listing Rules to ensure they reflect current standards in the market, and to address recent concerns about the quality and performance of some GEM applicants and listed issuers,” said David Graham, the HKEx’s Chief Regulatory Officer and Head of Listing. “We envision GEM continuing to have an important role in our market as a capital raising platform for small to mid-sized companies,” he added.5
The HKEx’s Listing Department and the SFC’s Corporate Finance Division have been working together on the review of GEM and established a joint working group in October 2015. The SFC supports the consultation on the review of GEM.6
The GEM review and changes to the GEM and Main Board Listing Rules consider four key areas:
- GEM’s position as a “stepping stone” to the Main Board;
- GEM’s admission requirements and delisting mechanism;
- the open market requirement for GEM companies; and
- eligibility requirements for the Main Board.
The key proposals in the GEM Review Consultation Paper on which the HKEx is seeking public feedback include:
- a reposition of GEM as a stand-alone board (instead of the current position of GEM as a “stepping stone” to the Main Board) and removal of the streamlined process for transfers from GEM to the Main Board. The changes would include the following:
- GEM transfer applicants would be required to appoint a sponsor and issue a “prospectus-standard” listing document to ensure that the appropriate due diligence is performed and full disclosure is made (currently, GEM issuers are allowed to transfer to the Main Board without de-listing from GEM and applying for a new listing on the Main Board, if they meet the Main Board listing requirements7; a GEM transfer applicant is not required to engage a sponsor to conduct due diligence and issue a “prospectus-standard” listing document, both of which are required for a Main Board or a GEM new listing applicant, and only has to prepare a GEM transfer announcement8);
- GEM transfer applicants would have to publish and distribute at least two full financial years of financial statements after their GEM listings (instead of the current requirement of one full financial year of financial statements9) before they can be considered for a GEM transfer; and
- GEM transfer applicants must not be subject to any disciplinary investigations by the HKEx in relation to a serious breach or potentially serious breach of any Listing Rules during 24 months (instead of the current requirement of 12 months10) before they can be considered for a GEM transfer;
- changes to some of the initial listing requirements for GEM admission:
- an increase in the minimum expected market capitalization of GEM applicants from HK$100 million11 (equivalent to approximately US$13 million)12 to HK$150 million (equivalent to approximately US$19 million) and a corresponding increase in the minimum public float value of a GEM company from HK$30 million13 (equivalent to approximately US$4 million) to HK$45 million (equivalent to approximately US$6 million);
- an increase in the cash flow requirement for GEM applicants from HK$20 million14 (equivalent to approximately US$3 million) to HK$30 million (equivalent to approximately US$4 million); and
- an introduction of a mandatory public offering requirement of at least 10% of the total offer size for all GEM IPOs to address a problem of high shareholding concentration at listing and ensure that there is an open market in the securities for which listing is sought15 (currently, GEM applicants are allowed to conduct placing-only offerings and public offering is not mandatory16; also, under the current practice, GEM issuers are allowed to re-allocate shares from the public tranche to the placing tranche if there is an insufficient demand in the public tranche);
an alignment of the GEM Listing Rules with the relevant requirements under the Main Board Listing Rules to increase the level of safeguards to GEM shareholders and achieve consistency between the GEM and Main Board Listing Rules with respect to:
- placing to core connected persons, connected clients and existing shareholders, and their respective close associates17 (the HKEx’s consent would be required prior to such placings); and
- the allocation of offer shares between the public and placing tranches and the clawback mechanism;
changes to some of the initial listing requirements for the Main Board admission to ensure that there is a clear distinction between the Main Board and GEM and preserve the Main Board’s position as a market for larger companies:
- an increase in the minimum expected market capitalization of the Main Board applicants from HK$200 million18 (equivalent to approximately US$26 million) to HK$500 million (equivalent to approximately US$64 million) and a corresponding increase in the minimum public float value of a Main Board company from HK$50 million19 (equivalent to approximately US$6 million) to HK$125 million (i.e., 25% of HK$500 million) (equivalent to approximately US$16 million); and
- an extension of the post-IPO lock-up requirement on controlling shareholders from one year to two years for GEM20 and, where appropriate, the Main Board21.
It is also proposed that the authority to approve or reject GEM listing applications, which has been delegated to the HKEx’s Listing Department since July 200822, would return to the Listing Committee23. The Listing Department would continue to vet the listing applications prior to presenting them to the Listing Committee, highlight to the Listing Committee all major issues for deliberation and consideration and reject cases which are clearly not eligible or suitable for listing.
Should the proposed changes to the GEM and Main Board Listing Rules be implemented, certain transitional arrangements would be put in place for the existing GEM issuers and applicants to minimize their impact.
The HKEx admits that its proposals set out in the GEM Review Consultation Paper will, among other things, raise the GEM quantitative admission requirements and, if adopted, will mean that emerging companies will find it more difficult to list on GEM. Given the above, the HKEx proposes that GEM would continue to be a capital raising platform for small to mid-sized companies, while a separate New Board would be created to accommodate needs of the emerging companies seeking listing in Hong Kong. In this respect, the HKEx has published the New Board Concept Paper which sets out its proposal for the establishment of a New Board, separate from the Main Board and GEM, to broaden access to capital markets in Hong Kong to a more diverse range of issuers. See our eUpdate regarding the New Board Concept Paper here. The HKEx also proposes to change the name “Growth Enterprise Market” to “GEM” to better reflect the nature of GEM issuers.
The HKEx invited public feedback on its proposals set out in the GEM Review Consultation Paper to be submitted by August 18, 2017 and aims to publish its conclusions on the proposals in late 2017.
1 In this eUpdate, we refer generally to “Hong Kong Exchanges and Clearing Limited”, its subsidiary “The Stock Exchange of Hong Kong Limited” and other members of its group as “HKEx”, for convenience, without distinguishing between them unless strictly necessary.
2 HKEx’s Concept Paper “New Board”, June 2017, available at: https://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp2017061.pdf.
3 HKEx’s Consultation Paper “Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules”, June 2017, available at: https://www.hkex.com.hk/eng/newsconsul/mktconsul/Documents/cp2017062.pdf.
4 HKEx’s News Release “HKEx seeks views on a proposed New Board and a review of the Growth Enterprise Market”, June 16, 2017, and “Q&A on Proposed New Board and GEM Review”, June 16, 2017. See also footnote 3.
5 HKEx’s News Release “HKEx seeks views on a proposed New Board and a review of the Growth Enterprise Market”, June 16, 2017.
6 HKEx’s “Q&A on Proposed New Board and GEM Review”, June 16, 2017.
7 Main Board Listing Rule 9A.02(1).
8 Main Board Listing Rule 9A.09.
9 Main Board Listing Rule 9A.02(2).
10 Main Board Listing Rule 9A.02(3).
11 GEM Listing Rule 11.23(6).
12 In this eUpdate, we used the exchange rate as of July 5, 2017 which was US$1 to HK$7.81.
13 GEM Listing Rules 11.23(2)(a) and 11.23(9).
14 GEM Listing Rule 11.12A(1).
15 As required by GEM Listing Rule 11.23.
16 GEM Listing Rule 10.12.
17 GEM Rules 10.12(3), 10.12(4) and 13.02(1); Main Board Listing Rules 10.03 and 10.04 and paragraph 5(2) of Appendix 6 of Main Board Listing Rules.
18 Main Board Listing Rule 8.09(2).
19 Main Board Listing Rules 8.08(1)(a) and 8.09(1).
20 GEM Listing Rule 13.16A.
21 Main Board Listing Rule 10.07(1).
22 GEM Rule 3.05.
23 The Listing Committee is composed of 28 members. These include market professionals drawn from asset management, legal and accounting circles with the relevant experience to oversee the listing functions of the HKEx. The Chief Executive of the HKEx is also an ex officio member of the Listing Committee.