The Hong Kong Stock Exchange (HKEx) published a consultation paper announcing the launch of a six-week consultation on GEM listing reforms, undertaking new initiatives to bolster its support for small and medium-sized enterprises (SMEs).
The consultation of reforms was introduced amid significant decline in the number of new listings and funds raised on the GEM since 2019. The proposals include a new alternative eligibility test for companies in the high-growth segment, the removal of some undue and rigid continuing obligations, and a new streamlined mechanism for eligible GEM companies to transfer to the HKEx Main Board.
Key features of the GEM listing reforms proposed by the HKEx are discussed below.
HKEx proposes introducing a new alternative eligibility test for initial listing on the GEM board, targeting high-growth enterprises that are heavily engaged in research and development (R&D) activities but do not have a sufficient track record of positive operating cash flow for the current listing requirements. Key proposed changes are summarized below for this alternative “market capitalization/ revenue/R&D test.”
|
Requirements |
Existing Test |
Proposed Alternative Test |
|
|
Track record |
Trading record |
2 full financial years |
|
|
Ownership continuity |
1 full financial year |
||
|
Management continuity |
2 full financial years |
||
|
Expected market capitalization at listing |
≥HK$150m |
≥HK$250m |
|
|
Cashflow (2-year aggregate) |
≥HK$30m |
/ |
|
|
Revenue |
2-year aggregate |
/ |
≥HK$100m |
|
Year-on-year growth |
/ |
Required |
|
|
R&D expenditure |
2-year aggregate |
/ |
≥HK$30m |
|
% of total operating expenditure |
/ |
≥15% each year |
|
Compliance Officer and Compliance Adviser
At its 1999 launch, the GEM’s initial “buyer beware” regulatory philosophy mandated unique compliance officer and compliance adviser requirements, expecting early-stage developing issuers. However, HKEx sees these requirements as increasingly irrelevant because (1) GEM listing applicants today are usually well established with a long history of operations at the time of application and (2) previous reforms over the years have converged GEM and Main Board Listing Rules requirements.
|
Existing Requirements |
Proposed Requirements
|
|
|
Compliance officer appointment |
One of the executive directors |
Requirement removed |
|
Period of compliance adviser engagement |
Ends on issuer publishing its second full financial year’s results |
Ends on issuer publishing its first full financial year’s results |
Periodic Reporting Requirements for GEM Issuers
HKEx proposes removing the existing mandatory quarterly reporting requirements and aligning other ongoing obligations with those of the Main Board. This proposal aims at reducing the compliance costs of a GEM listing.
|
|
Existing Publishing Deadline |
Proposed Publishing Deadline
|
|
Annual reports |
Three months after the financial period ends |
Four months after the financial year ends |
|
Half-year reports |
45 days after the financial period ends |
Three months after the first six months of the financial year end |
|
Quarterly reports |
45 days after the financial period ends |
Recommended only as best practice in the GEM’s Corporate Governance Code |
|
Preliminary results announcement of first six months of a financial year
|
45 days after the first six months of the financial year end |
Two months after the first six months of the financial year end |
The lack of a streamlined transfer mechanism to the Main Board has encouraged many SMEs to stay private and plan for a direct Main Board listing rather than a GEM listing. With recent market quality reforms successfully suppressing shell activities, HKEx now seeks to boost the GEM’s attractiveness by reinstating a new streamlined transfer mechanism.
The following is an overview of the proposed requirements for GEM issuers under the streamlined approach:
A GEM issuer can still apply for a transfer under existing requirements if it does not meet the proposed streamlined transfer requirements. Each requirement in the overview of the streamlined approach is analyzed in detail below.
Proposed Streamlined Transfer Mechanism
|
|
Existing Requirements |
Proposed Requirements
|
|
Main Board qualifications |
A transfer applicant must meet all the qualifications for listing on the Main Board.
|
|
|
Sponsor appointment/due diligence |
A transfer applicant must appoint a sponsor at least two months before submitting a transfer application. |
A transfer applicant will not be required to appoint a sponsor to conduct due diligence for its transfer.
|
|
Track record |
A transfer applicant must have published its financial results for the first full financial year commencing after the date of its initial listing on the GEM.
|
A transfer applicant must have published its financial results for the three full financial years as a GEM-listed issuer before its transfer, with (1) ownership continuity and control, and (2) no fundamental change in its principal business, throughout that period.
|
|
Listing document/application documents submission |
A transfer must issue a “prospectus-standard” listing document |
A transfer applicant will not be required to issue a “prospectus-standard” listing document.
A transfer applicant must instead submit the following application documents to the Listing Division:
|
|
Compliance record |
A transfer applicant must not have been the subject of any disciplinary investigation by HKEx in relation to serious breach or potentially serious breach of any Listing Rules in the 12 months before the transfer application and until the commencement of dealings in its securities on the Main Board.
|
A transfer applicant must
|
Daily Turnover Test
|
Definition |
Daily Turnover: Total value of an applicant’s GEM shares traded on a trading day |
|
Minimum Turnover Threshold: Either HK$100,000 or HK$50,000, depending on the result of the public consultation |
|
|
Reference Period: The 250 trading days immediately before the transfer application and until the commencement of dealings on the Main Board |
|
|
The Test |
A transfer applicant must have reached the Minimum Turnover Threshold on at least 50% of the trading days over the Reference Period. |
Volume Weighted Average Market Capitalization Test
|
Definition |
Daily Market Capitalization on any trading day – Number of total issued shares x (Daily Turnover/Number of shares traded) |
|
Volume Weighted Average Market Capitalization – The weighted average of Daily Market Capitalization based on trading volume over the Reference Period |
|
|
Reference Period – The 250 trading days immediately before the transfer application and until the commencement of dealings on the Main Board |
|
|
The Test |
A transfer applicant’s Volume Weighted Average Market Capitalization over the Reference Period must meet the minimum market capitalization requirement for listing on the Main Board based on the applicable threshold. |
The proposed listing reforms demonstrate HKEx’s determination to revitalize the GEM as an important platform for high-growth SMEs and investors in the wake of the impact of COVID-19 pandemic and alternative venues of SME listing. While the proposal is a positive step forward, HKEx is mindful of the need to balance its commitment in protecting the interests of investors. The public comment period for the consultation ends on November 6, 2023.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following: