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Hong Kong Stock Exchange proposes reform to GEM Listings

2023-10-31

On 26 September 2023, the Stock Exchange of Hong Kong Limited (the “Stock Exchange”) published a consultation paper on GEM listing reforms (the “Consultation Paper”). The background for this consultation is that the number of new listings and funds raised on GEM have significantly dropped since 2019. The Stock Exchange acknowledges the importance of small and medium enterprises (“SMEs”) to the Hong Kong economy and recognizes that GEM is one of the sources of funding for SMEs to seek capital to sustain their innovation, value creation and growth. To address concerns regarding GEM as raised by different stakeholders, the Stock Exchange proposes to reform the GEM listing.

Proposals

1. Introduction of an alternative financial eligibility test

High growth enterprises that are heavily engaged in research and development (“R&D”) activities may not have a sufficient track record of positive operating cash flow under the existing requirements. The Stock Exchange proposes a new financial eligibility test (the “New Test”) for such companies. A comparison between the existing requirements and the New Test is set out as follows:

	Existing requirements	New Test
Trading record	At least 2 years
Market capitalization at the time of listing	At least HK$ 150 million	At least HK$ 250 million
Cash flow	Positive cash flow from operating activities of at least HK$ 30 million (in aggregate for the two financial years prior to listing)	Nil
Revenue	Nil	At least HK$ 100 million (in aggregate for the two most recent audited financial years, with year-on-year growth over the two financial years)
R&D expenditure	NIL	At least HK$30 million (in aggregate for the two financial years prior to listing, where the R&D expenditure incurred for each financial year must be at least 15% of its total operating expenditure for the same period)
Ownership continuity	Throughout the full financial year immediately preceding the issue of the listing document and up until the date of listing
Management continuity	Throughout the 2 full financial years immediately preceding the issue of the listing document and up until the date of listing

2. Reduction of post-IPO lock up period for controlling shareholders

The Stock Exchange proposes to reduce the 24-month post-IPO lock-up period imposed on the controlling shareholders of GEM issuers to 12 months, as in line with Main Board requirements.

3. Introduction of a new streamlined transfer mechanism

To enable qualified GEM issuers to transfer their listings to the Main Board, the Stock Exchange proposes to reinstate the streamlined mechanism (the “Streamlined Mechanism”), which was previously abolished in 2018, with modified eligibility requirements. A comparison between the existing requirements and the Streamlined Mechanism is set out as follows:

	Existing requirements	Streamlined Mechanism
Qualifications for transfer	The transfer applicant must meet all the qualifications for listing on the Main Board.
Track record	The transfer applicant must have published its financial results for the first full financial year commencing after the date of its initial listing on GEM.	The transfer applicant must comply with the Stock Exchange’s requirement in respect of its financial results for the three full financial years as a GEM listed issuer prior to its transfer, with (i) ownership continuity and control, and (ii) no fundamental change in its principal business, throughout that period.
Daily turnover	NIL	The transfer applicant must have reached the minimum daily turnover threshold on at least 50% of the trading days over the 250 trading days immediately preceding the transfer application and until the commencement of dealings in its securities on the Main Board (the “Reference Period”). The Stock Exchange proposes that the minimum daily turnover threshold be set at either HK$100,000 or HK$50,000 and seek views on which is preferred.
Volume weighted average market capitalisation test	Nil	The transfer applicant must have a volume weighted average market capitalisation over the Reference Period that could meet the minimum market capitalization requirement for listing on the Main Board.
Compliance	The transfer applicant must in the 12 months preceding the transfer application and until the commencement of dealings in its securities on the Main Board, not have been the subject of any disciplinary investigation by the Exchange in relation to a serious breach or potentially serious breach of any Listing Rules.	The transfer applicant must (i) not have been held to have committed a serious breach of any Listing Rules in the 12 months preceding the transfer application and until the commencement of dealings in its securities on the Main Board; and (ii) not be the subject of any investigation by the Exchange, or any ongoing disciplinary proceedings under Chapter 3 of the GEM Listing Rules, in relation to a serious breach or potentially serious breach of, any Listing Rules as at the date of the transfer application and the date when dealing in its securities commences on the Main Board.
Sponsor appointment/ due diligence	A sponsor must be appointed at least two months before the submission of a transfer application.	No longer required.
Publication of a listing document	A transfer applicant is required to issue a “prospectus-standard” listing document to ensure appropriate due diligence is performed and full disclosure is made (without being required to conduct an offering).	No longer required. A transfer applicant will only be required to submit certain application documents as required by the Exchange.
Transfer announcement	Nil	The transfer applicant will be required to publish an announcement as soon as practicable before the intended date dealings in the issuer’s shares on the Main Board are expected to commence. Such announcement should be pre-vetted by the Listing Division.

4. GEM’s continuing obligations in line with those for Main Board issuers

Considering certain stakeholder comments that the GEM Listing Rules impose undue and rigid continuing obligations, the Stock Exchange proposes amendments as set out below that will bring the relevant GEM’s continuing obligations in line with those for Main Board issuers:

	Existing requirements	Proposed changes
Compliance officer	One of the executive directors of a GEM issuer must assume responsibility for acting as its compliance officer.	No longer required
Compliance adviser	A GEM issuer must appoint a compliance adviser for the period commencing on the date of initial listing and ending on the date on which the GEM issuer publishes its financial results for the second full financial year commencing after the date of its initial listing.	The period of engagement of the compliance adviser of a GEM issuer will be shortened so that it ends on the date on which the GEM issuer publishes its financial results for the first full financial year commencing after the date of its initial listing.
Compliance adviser	There are requirements relating to a compliance adviser’s responsibilities with regards to: (a) due diligence on listing documents published, and dealing with the Stock Exchange, in relation to certain transactions during the period of engagement of the compliance adviser; and (b) disclosure of interests of the compliance adviser for this purpose.	No longer required.
Periodic reporting requirements	A GEM issuer is required to publish, inter alia:- (a) quarterly reports not later than 45 days; and (b) preliminary announcements of results for each of the first three month and nine month periods of each financial year not later than 45 days, after the date upon which the financial period ended.	Quarterly reporting is no longer required.
Timeframe for publication	A GEM issuer is required to publish, inter alia:- (a) annual reports not later than three months; (b) half-year reports not later than 45 days; (c) preliminary announcements of results for the financial year not later than three months; and (d) preliminary announcements of results for the first six months of each financial year not later than 45 days, after the date upon which the financial period ended.	A GEM issuer is required to publish, inter alia:- (a) annual reports not later than four months; (b) interim reports not later than three months; (c) preliminary announcements of results for the financial year not later than three months; and (d) preliminary announcements of results for the first six months of each financial year not later than two months, after the date upon which the financial period ended.

Conclusion

The proposed amendments are expected to improve attractiveness of GEM listing by removing the undue and rigid requirements and lowering the costs of listing and compliance in GEM listing. The consultation period will end on 6 November 2023 and the feedback of the market will be soon revealed.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.