The Stock Exchange of Hong Kong Limited issued a consultation paper in December 2024 on proposals to optimize IPO price discovery and open market requirements. The consultation aims to review the relevant regulatory framework and enhance the competitiveness of the Hong Kong securities market while improving the transparency and efficiency of the IPO process. This public consultation will last for three months, ending on March 19, 2025.
The HKEx’s key proposals are discussed below:
1. OPEN MARKET REQUIREMENTS
The HKEx aims to review open market requirements, ensuring issuers will have sufficient shares in public hands that are available for trading at listing, while relaxing certain percentage thresholds that would imply a bar that may be too high in absolute dollar value.
The HKEx proposed the following changes:
- Public Float Calculation: Align with international standards by excluding shares that are not fungible in Hong Kong (e.g., A shares) from public float calculations. The public float percentage of securities new to listing are calculated, normally, by reference to the total number of securities of that class only. In the case of a PRC issuer, its public float percentage would be calculated by reference to its H shares only. In the case of an issuer with other share class(es) listed overseas, its public float at listing should be calculated as a percentage of the issuer’s total number of issued shares (of all classes). However, only shares of the class for which listing is sought in Hong Kong will count toward meeting minimum public float thresholds.
- Tiered Initial Public Float Threshold: Replace the existing thresholds with the following tiered structure based on market capitalization:
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Tier
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Expected market value of the relevant class of securities at the time of listing
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Minimum percentage of such class of securities to be held in public hands at the time of listing
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A
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≤HK$6 billion
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25%
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B
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>HK$6 billion to
≤HK$30 billion
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The higher of: (1) the percentage that would result in the expected market value of such securities in public hands to be HK$1.5 billion at the time of listing; and (2) 15%
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C
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>HK$30 billion to
≤HK$70 billion
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The higher of: (1) the percentage that would result in the expected market value of such securities in public hands to be HK$4.5 billion at the time of listing; and (2) 10%
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D
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>HK$70 billion
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The higher of: (1) the percentage that would result in the expected market value of such securities in public hands to be HK$7.0 billion at the time of listing; and (2) 5%
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- Ongoing Public Float: Currently, listed issuers are required to maintain the same level of public float that they had at the time of listing, which is typically at least 25% of an issuer’s total number of issued shares (excluding treasury shares) at all times, unless the expected market capitalization at the time of listing is over HK$10 million. This requirement is much more stringent than that of many international markets, including Nasdaq (Global Select Market) and NYSE. The HKEx is seeking feedback on allowing more flexibility to maintain lower public float levels, after listing, than that required at listing and whether the existing regulatory approach of suspending trading of issuers with public float below a prescribed level should be maintained. Subject to market feedback, the HKEx will conduct further consultation on detailed ongoing public float proposals and introduce any changes together with changes to the initial public float requirements as one package.
- Free Float Requirement: Introduce a requirement that a certain portion of shares for which listing is sought on the HKEx be held by the public and not subject to any disposal restrictions at the time of listing to provide greater liquidity.
- Requirements for A+H Issuers and Other Prescribed Types of Issuers: Lower the minimum H-share issuance threshold and replace it with the requirement that, in the case of a new applicant that is a PRC issuer with other listed shares, such as an A+H issuer, H shares for which listing is sought on the HKEx must, at the time of listing, either represent at least 10% of the total number of shares in the class to which H shares belong (excluding treasury shares) or have an expected market value of at least HK$3 billion.
2. IPO OFFERING MECHANISM
With a view to optimizing the price discovery process for IPOs to increase the participation of “price setting” investors, thereby reducing the likelihood of the final offer price being set at a large disparity to the actual trading price when dealings in those shares commence, the HKEx proposed the following changes:
- Lock-up Requirement for Cornerstone Investors: The HKEx is seeking feedback on either retaining the current lock-up period of at least six months after listing or introducing staggered lock-up releases, where 50% of the securities could be released after three months, and the remainder fully released after six months upon listing.
- Allocation to the Placing Tranche: Require at least 50% of the total number of shares initially offered in an IPO be allocated to investors in the bookbuilding placing tranche (except for Specialist Technology Companies); and remove the requirements that there must be: (1) no fewer than three holders for each HK$1 million is placed; and (2) a minimum of 100 holders in an IPO placing tranche.
- Public Subscription Tranche: Propose two mechanisms for allocation, either (1) a mandatory initial allocation of 5% of the offer shares to the public subscription tranche and mandatory clawback mechanism that increases the allocation to up to 20%; or (2) a minimum initial allocation of 10% of the offer shares to the public subscription tranche without clawback mechanism (not available to Specialist Technology Companies).
- Pricing Flexibility Mechanism: Allow flexibility to increase the offering price by up to 10% above the initial price. The HKEx also consults on maintaining the top of the initial offer price rage at not more than 30% of the bottom of that range, or narrowing it to not more than 20% of the bottom of that rang
3. TRANSPARENCY OF PUBLIC FLOAT
The HKEx proposes to mandate annual disclosure of the actual public float percentage and detailed shareholding composition in annual reports of listed issuers.
4. ESTABLISHING AN OVER-THE-COUNTER TRADING MARKET
The HKEx is seeking market feedback on establishing an OTC trading market in Hong Kong to facilitate trading of securities from issuers who have been delisted and improve investor exit opportunities. There is currently no alternative trading platform available in Hong Kong for delisted securities. The HKEx is considering adopting an approach similar to the US market’s to provide a platform for shareholders of a delisted company to trade out of their positions.
CONCLUSION
These proposals demonstrate the HKEx’s effort to enhance the competitiveness of Hong Kong as a listing venue and promote active trading post-listing, thereby improving liquidity and increasing transparency to shareholders and investors. If adopted, the changes will impact both IPO applicants and existing listed issuers. The three-month consultation will end on March 19, 2025.