Hong Kong Stock Exchange Proposes New Listing Regime for Specialist Tech Companies

The Hong Kong Stock Exchange (HKEx) has issued its much-anticipated consultation paper on creating a listing regime for Specialist Technology Companies (STCs) under proposed Chapter 18C of the HKEx listing rules, with a view toward launching in the first half of 2023. The new listing regime eases the existing profit and trading record requirements under the listing rules for STCs, and is expected to facilitate a number of large, emerging, and innovative technology enterprises with high growth potential to list on the HKEx.

The HKEx’s proposal of the new listing regime forms part of its ongoing diversification efforts, among other reforms since 2018, to further enhance Hong Kong’s position as a global fundraising platform and an international financial center. Key features of the proposed listing regime follow.

Specialist Technology Industries and Acceptable Sectors

The proposed regime covers the below specialist technology industries and acceptable sectors, which will be updated from time to time by the HKEx.

Categories of Specialist Technology Companies

STCs fall into two categories: (1) Commercial Companies, which have achieved meaningful commercialization of their specialist technology products (as indicated by their revenue achieving a minimum threshold); and (2) Pre-Commercial Companies, which are primarily engaged in research and development (R&D) to bring their specialist technology products to commercialization or have not yet achieved the minimum revenue threshold. Additional listing requirements and post-listing compliance requirements apply to Pre-Commercial Companies, as they face greater risks of corporate failure due to heavy reliance on equity or debt financing for working capital needs.

Qualifications for Listing

See this chart for a comparison between the key qualification requirements under the proposed Chapter 18C between Commercial Companies and Pre-Commercial Companies and Rule 8.05 of the listing rules. View the comparison chart >

Valuation and Subscription

To deal with the issues associated with accurate valuation of STCs, due to the novelty of their industries with no authoritative references to comparable companies in more traditional industries, the HKEx proposed a robust price discovery process:

• At least 50% of the total number of shares offered in the initial public offering (IPO) should be allocated to independent institutional investors.
• According to Practice Note 18 of the listing rules, the minimum percentage of IPO shares allocated to the public is adjusted upward (to as high as 50% of the offer shares) if public demand for the IPO shares increases. This, in turn, reduces the portion of shares allocated to institutional investors. The problem with this allocation, also known as a clawback mechanism, is that retail investors, without the time and resources available to institutional investors to conduct due diligence, will not be able to accurately value an STC.
• In view of this deficiency, the new prescribed initial retail allocation and clawback mechanism are adopted and shown in the table below:

Furthermore, a minimum free float of at least HKD 600 million upon listing is proposed.

Whereas existing shareholders of listing applicants cannot normally participate either (1) as a cornerstone investor and a placee if they hold 5% or more of the applicant’s voting rights, or (2) if they are a “core connected person” (e.g., director, substantial shareholder) or a close associate of such a person, it is proposed that the existing shareholders (including controlling shareholders) of an STC (as with other technology, media, and telecom (TMT) company applicants) may participate in the STC’s IPO as cornerstone investors or placees.

Disclosure Requirements

Both Commercial Companies and Pre-Commercial Companies are required to disclose all of the following:

• Pre-IPO investments and cash flow
• Products and commercialization status and prospects
• R&D activities
• Industry-specific information (e.g., applicable standards or regulatory requirements)
• Intellectual property

To address the associated heightened risks and promote valuation transparency, Pre-Commercial Companies are subject to more onerous disclosure requirements. For instance, a Pre-Commercial Company must detail the key stages and milestones for its products to achieving the commercialization revenue threshold and all the relevant risks associated with the commercialization of its products.

Post-IPO Lock-up

In addition to the existing lock-up requirements on controlling shareholders, shares held by other key persons—namely, founders, weighted voting rights (WVR) beneficiaries, executive directors and senior management, and key personnel responsible for the technical operations and/or R&D and Pathfinder SIIs—will be subject to lock-up for 12 months for a Commercial Company and 24 months for a Pre-Commercial Company.

Continuing Obligations for Pre-Commercial Companies

In order for investors to keep track of the company’s business growth, it is proposed that, until a Pre-Commercial Company satisfies (1) the revenue threshold for Commercial Companies or (2) one of the Main Board Eligibility Tests under Rule 8.05, it will be subject to additional disclosure obligations after its successful listing on the HKEx.

The additional disclosures are required in interim and annual reports, and include the following:

• Timeframe for, and any progress made toward, achieving the commercialization revenue threshold
• Updates on any business and financial estimates provided in the prospectus
• Details of R&D activities and development progress of specialist technology products
• Any material changes to use of proceeds
• Statement that it adopts the same milestones and metrics used in the prospectus so as to enable investors to assess how well the company is adhering to intentions stated in the prospectus
• Summary of R&D investment during the relevant period
• Prominently disclosed warning that the company may not achieve the commercialization revenue threshold

Additionally, where the HKEx considers that a Pre-Commercial Company has failed to meet its continuing obligation to maintain sufficient operations or assets, the HKEx may give the issuer a period of up to 12 months (shorter than the usual 18 months) for re-compliance before delisting.

Pre-Commercial Companies are also restricted from effecting any transaction that will result in a fundamental change to its principal business for as long as it remains a Pre-Commercial Company, unless it has obtained prior consent of the HKEx. Again, this restriction is more stringent than that imposed on other listed issuers, which are subject to a similar restriction but only for the first 12 months after listing.

Conclusion

The proposed new listing regime for STCs is expected to benefit many innovative companies around the world and allow them to access the world-class fundraising platform in Hong Kong. This proposal is consistent with the HKEx’s successful efforts in recent years to diversify its offerings.