Hong Kong’s proposed listing regime for specialist technology companies
The information technology industry now represents 30% of the total market capitalisation of the Stock Exchange of Hong Kong (SEHK), implying a rapid rise from 15% prior to 2018. Yet, it is essential for Hong Kong to further attract company listings in different technology sectors.
Since October 2022, the SEHK has been seeking public views on its proposed listing regime for “specialist technology companies”, which are companies engaging in:
- next-generation information technology;
- advanced hardware;
- advanced materials;
- new energy and environmental protection; and
- new food and agriculture technologies.
The objective is to allow these types of companies to apply for listing on the SEHK main board even if they cannot satisfy the usual profit, revenue and cash flow criteria. The SEHK may update acceptable sectors of the new listing regime from time to time.
PROPOSED LISTING REQUIREMENTS
Proposed are two types of specialist technology companies, namely “commercial companies” ‒ meaning those that have commercialised their technology products with a revenue of at least HKD250 million (USD32 million) for the most recent audited financial year ‒ and “pre-commercial companies”, meaning those that have not met such revenue threshold.
There are no profit or cash flow requirements for either type, but each specialist technology company must have at least three financial years of operation (with R&D activities) under substantially the same management prior to listing. There should also be ownership continuity and control of the company in the 12 months prior to its listing application.
The minimum market capitalisation of a commercial company and a pre-commercial company is proposed to be HKD8 billion and HKD15 billion, respectively. The R&D investment of a commercial company should constitute at least 15% of its total operating expenditure for each of the three financial years prior to listing, while the percentage for a pre-commercial company is 50%.
Independent pre-IPO investments could help mitigate public concerns over the difficulty in valuing specialist technology companies. Thus, the SEHK proposes that each company should have received investments at least 12 months prior to listing application from at least two sophisticated independent investors, each holding shares or securities convertible into shares equivalent to 5% or above of the company’s share capital at time of listing application (pathfinder investors).
The prescribed minimum equity holding by all sophisticated independent investors varies from 10% to 25%, depending on whether it is a commercial company, and its market capitalisation expected at listing.
As an additional requirement, each pre-commercial company should have available working capital (including IPO proceeds) to cover at least 125% of its costs for the next 12 months.
LISTING IPO REQUIREMENTS
The SEHK expects the share offer of a specialist technology company to include both a placing tranche and a public subscription tranche and to be of a meaningful size. The minimum free float (being shares not subject to any disposal restrictions) should be HKD600 million (USD76.7 million) or more upon listing. At least 50% of the total number of shares offered in the IPO of a specialist technology company must be allocated to independent institutional investors.
The SEHK also proposes a new initial retail allocation and clawback mechanism. The minimum retail allocation is initially 5% of the total offered shares, and should be increased to 10% if the public subscription tranche is over-subscribed by 10 times but less than 50 times, and to 20% if the over-subscription is by 50 times or more.
A pre-commercial company must disclose in its listing document the key stages and milestones for its specialist technology products to achieve the proposed commercialisation revenue threshold of HKD250 million.
POST-IPO LOCKUP PERIODS
Certain pre-IPO shareholders of specialist technology companies are subject to longer lockup periods (i.e., periods in which disposal of shares is restricted or prohibited) compared with most types of main board listing applicants.
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First published in December 2022 / January 2023 combined issue of China Business Law Journal.
Note: This material has been prepared for general information purposes only and is not intended to be relied upon as professional advice for any cases. Should you need further information or legal advice, please contact us.