Hong Kong stock exchange proposes new listing regime for innovative science and technology companies
Background
On 19 October 2022, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper proposing a new regulatory framework for the listing of “Specialist Technology Companies” under a new chapter (Chapter 18C) to the Rules Governing the Listing of Securities on the Main Board of the Exchange (the “Listing Rules”). The consultation period will end on 18 December 2022. This client alert aims to provide a brief overview of the proposal.
Specialist Technology Companies are companies that primarily engage in the research and development (“R&D”) of, and the commercialisation and/or sales of, products and/or services (the “Specialist Technology Products”) with science and/or technology applied thereto (the “Specialist Technology”) within an acceptable sector of a Specialist Technology Industry. Due to the evolving nature of technology, the Exchange will set out the Specialist Technology Industries and acceptable sectors in a non-exhaustive list to be updated from time to time, which currently covers:
- next-generation information technology – including cloud-based services and artificial intelligence;
- advanced hardware – including robotics and automation, semiconductors, advanced communication technology, electric and autonomous vehicles, advanced transportation technology, aerospace technology, advanced manufacturing, quantum computing and metaverse technology;
- advanced materials – synthetic biological materials, smart glass and nanomaterials;
- new energy and environmental protection – new energy generation, new energy storage and transmission technology and new green technology; and
- new food and agriculture technologies – new food technology and new agriculture technology.
The Exchange indicated that the proposal does not limit to those applicants with "leading-edge" technologies as it is believed that the success of a Specialist Technology Company would often be attributed to the successful commercialisation of the core technology rather than the innovativeness of the technology itself. Companies with multiple business segments may also take advantage of the proposed new regime as long as they are "primarily engaged" in the relevant business of a Specialist Technology Industry.
Specialist Technology Companies are categorised into (i) companies that have commercialised their Specialist Technology Products and have generated meaningful revenue, i.e. the Commercial Companies, and (ii) companies that are (a) primarily engaged in R&D and are raising funds to further their R&D to commercialise their Specialist Technology Products and/or (b) have not yet generated meaningful revenue, i.e. the Pre-commercial Companies. Pre-commercial Companies are subject to more stringent listing requirements given the heightened risks they are associated with.
Key Listing Qualification Requirements
Subject
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Commercial Companies
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Pre-commercial Companies
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Attributes
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- it has high growth potential;
- its success can be demonstrated to be attributable to the application to its core business of new technologies and/or the application of Specialist Technology to a new business model, which also serves to differentiate it from traditional market participants serving similar consumers or end users; and
- R&D significantly contributes to its expected value and constitutes a major activity and expense
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Expected market capitalisation upon listing
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≥ HK$8 billion
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≥ HK$15 billion
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Revenue from Specialist Technology business segment for the most recent audited financial year
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≥ HK$250 million (normally the Exchange expects to see year-on-year revenue growth throughout track record period while allowing temporary declines due to economic, market or industry-wide conditions)
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N/A
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Minimum period and investment in R&D of Specialist Technology Products prior to listing
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At least 3 financial years and 15% of total operating expenditure for each year
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At least 3 financial years and 50% of total operating expenditure for each year
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Minimum operational track record period
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At least 3 financial years of operation under substantially the same management (the Exchange may accept at least 2 financial years in exceptional cases)
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Ownership continuity
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12 months prior to the date of listing application
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Third-party investment
(the rationale behind is to help ensure the applicant has been subject to extensive due diligence checks by investors who have taken on significant investment risk and provide independent third-party validation in the absence of a competent authority)
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Must have received meaningful investment from sophisticated independent investors (“SII”)
- SII refers to an investor who is not a core connected person of the applicant and who is considered sophisticated based on its investment experience, knowledge and expertise, net assets, assets under management (“AUM”), size of investment portfolio and track record of investments, which generally include, for illustrative purpose only, the following:
- an asset management firm or a fund managed by a fund manager with AUM of, a fund with fund size of, or a company with a diverse investment portfolio size of, at least HK$15 billion, or HK$5 billion where such value is derived primarily from Specialist Technology investments; or
- a key participant in relevant upstream or downstream industry with substantial market share and size, supported by appropriate independent market or operational data
- Meaningful investment refers to:
- investment from at least 2 SIIs (the “Pathfinder SII”) at least 12 months before listing application, with each SII holding at least 5% of the issued share capital of the applicant throughout the pre-application 12-month period; and
- at least the following aggregate investment as a percentage of the issued share capital of the applicant from all SIIs at the time of listing (including both pre-IPO investment and offer shares issued to the SIIs during IPO):
- if expected market capitalisation is less than HK$20 billion, 20% for Commercial Companies and 25% for Pre-Commercial Companies;
- if expected market capitalisation is HK$20 billion or more but less than HK$40 billion, 15% for Commercial Companies and 20% for Pre-Commercial Companies; and
- if expected market capitalisation is more than HK$40 billion, 10% for Commercial Companies and 15% for Pre-Commercial Companies
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Additional qualification requirements for Pre-Commercial Companies
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N/A
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- Use of proceeds: IPO proceeds to be used for R&D of, and the manufacturing and/or sales and marketing of, its Specialist Technology Products to bring them to commercialization and achieving the minimum revenue threshold for a Commercial Company, i.e. HK$250 million (the “Commercialisation Revenue Threshold”)
- Demonstration of credible path: must demonstrate and disclose in the listing document a credible path to achieving the Commercialisation Revenue Threshold, including the timeframe for and impediments to achieving such threshold and financing plan to address the funding gap in the event of insufficient working capital
Examples of demonstrating a credible path include binding contracts or non-binding framework agreements with a reasonable number of independent customers for the development, testing or sales of Specialist Technology Products with a substantial potential aggregate contract value realisable within 24 months from the date of listing, or beyond 24 months in exceptional circumstances where the independent customers are highly reputable (e.g. key market participant in relevant upstream or downstream industry with substantial market share and supported by independent market or operational data, or a state or a state corporation)
Independent customers are those who are not core connected persons of the applicant (except for those being connected only by virtue of being substantial shareholders)
- Enhanced working capital: must have available working capital (taking into account expected IPO proceeds) to cover at least 125% of its group’s costs (which must substantially consist of general, administrative and operating costs and R&D costs) for at least the next 12 months after listing
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Key Offering and Disclosure Requirements
Subject
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Commercial Companies
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Pre-commercial Companies
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More robust price discovery process
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- Minimum allocation to independent institutional investors: must allocate at least 50% of the total shares offered in IPO (not taking into account over-allotment option) to independent institutional investors (i.e. institutional professional investors participating in the placing tranche of IPO, whether as cornerstone investor or otherwise, excluding existing shareholders and any of their close associates, and core connected persons of the applicant)
- Requirement also applies to a Specialist Technology Company listing by way of a De-SPAC transaction (not taking into account shares issued to existing shareholders of the De-SPAC target as consideration for acquiring the De-SPAC target)
- The Exchange will consider granting waiver on a case-by-case basis in the case of a Specialist Technology Company seeking to list by introduction
- Minimum retail allocation: revised minimum retail allocation as of total shares offered in IPO and clawback mechanism as follows:
- ≥ 10x to < 50x of over-subscription in the public subscription tranche: 10%
- ≥ 50x of over-subscription in the public subscription tranche: 20%
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Requirements on free float and offer size
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- Free float: minimum free float (being shares not subject to any disposal restrictions whether under contract, the Listing Rules, applicable laws or otherwise) of at least HK$600 million upon listing
- Offer size: the Exchange would expect the listing of a Specialist Technology Company to be accompanied by an offer (including both the placing tranche and the public subscription tranche) of a meaningful size and reserves the right not to approve the listing if the offer size is not significant enough to facilitate post-listing liquidity, or otherwise gives rise to orderly market concerns
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Subscription of IPO shares by existing shareholders
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Existing shareholders are allowed to participate in the IPO of a Specialist Technology Company as either cornerstone investor or placee (if holding less than 10% of shares) or as cornerstone investor (if holding 10% or more of shares), provided that the applicant complies with the public float requirement, the minimum allocation to independent institutional investors requirement and the minimum free float requirement (see above)
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Disclosure requirements
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- Must disclose additional information in the listing document to facilitate IPO investors’ assessment of a Specialist Technology Company, including:
- valuation related information in each round of pre-IPO investments
- burn rate and historical and future cash operating cost
- Specialist Technology Products and their commercialisation status and prospects
- R&D activities and experience
- market share and industry specific information
- industry standards and competent authority requirements
- details of intellectual property rights
- warning statement on the cover of the listing document regarding the heightened investment risks
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Additional disclosure requirements for Pre-Commercial Companies
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N/A
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Must disclose in the listing document:
- the stage of research and development for each of its Specialist Technology Products
- the key stages and milestones for its Specialist Technology Products to achieve the Commercialisation Revenue Threshold
- all relevant risks associated with the commercialisation of each of its Specialist Technology Products
- additional warning statement regarding the risk of operation failure due to lack of available funds
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Key Post-IPO Requirements
Subject
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Commercial Companies
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Pre-commercial Companies
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Post-IPO lock-up obligation (continue to apply even if the designation of Pre-Commercial Company has been removed)
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Controlling shareholders
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12 months
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24 months
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Key persons as identified in the listing document (including founders, beneficiaries of weighted voting rights, executive directors and senior management and key personnel responsible for technical operations and/or R&D of Specialist Technology Products) and their close associates
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12 months
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24 months
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Pathfinder SIIs
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6 months
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12 months
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Cornerstone investors (including existing shareholders subscribing for shares as cornerstone investors)
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Generally 6 months similar to other cornerstone investors
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Deemed disposal
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Deemed disposal resulting from allotment, grant or issue of new securities by a Specialist Technology Company in compliance with the Listing Rules during lock-up period will not be regarded as breach of the lock-up restrictions
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Additional continuing obligations for Pre-Commercial Companies (until removal of designation of pre-Commercial Companies when achieving the Commercialisation Revenue Threshold or meeting at least one of the Main Board eligibility tests under Listing Rule 8.05)
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N/A
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- Disclosure: must disclose in the interim and annual reports:
- details of the development progress of its Specialist Technology Products
- timeframe for and progress made towards achieving the Commercialisation Revenue Threshold, including any updates to previously disclosed information
- updates on any revenue, profit and other business and financial estimates as previously disclosed
- summary of R&D investments
- prominently disclosed warning that the Company may not achieve the Commercialisation Revenue Threshold
- Sufficient operations: shortened remedial period of 12 months (rather than the usual 18 months) for re-compliance with the sufficiency of operations requirement before delisting
- Material changes: restricted from effecting any transaction that would constitute a material change of business without the prior consent of the Exchange
- Stock marker: identified through the stock marker “PC” at the end of its stock name
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Please do not hesitate to contact us if you require assistance on the above matters.
Authored by Nelson Tang and Angel Shi.