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The Stock Exchange published consultation conclusions on listing regime for Specialist Technology Companies

2023-03-31

Introduction

In our previous newsletter, “The Stock Exchange published consultation paper on the listing regime for Specialist Technology Companies“，we discussed the consultation paper issued by The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) in October 2022 (the “Consultation”), which sought the market’s opinion on a proposed regime for Specialist Technology Companies (as defined below) to be listed on the on the Main Board of the Stock Exchange under the proposed Chapter 18C of the Rules Governing the Listing of Securities on the Stock Exchange (the “Listing Rules”). In March 2023, the Stock Exchange published conclusions to the Consultation (the “Consultation Conclusions”).

New listing regime for Specialist Technology Companies

Upon considering the market feedback, the Stock Exchange has decided to largely implement the proposals set out in the Consultation, with the following key amendments made in response to the comments of the respondents:

1. Acceptable sectors of a Specialist Technology Industry

In the Consultation, the Stock Exchange proposed to define:

1. “Specialist Technology Company” as “a company primarily engaged (whether directly or through its subsidiaries) in the research and development of, and the commercialisation and/or sales of, Specialist Technology Products within an acceptable sector of a Specialist Technology Industry”;

2. a “Specialist Technology Product” as “a product and/or service (alone or together with other products or services) that applies Specialist Technology”; and

3. “Specialist Technology” as “science and/or technology applied to products and/or services within an acceptable sector of a Specialist Technology Industry”.

The Consultation Conclusions suggest that Stock Exchange has decided to adopt the proposed definitions without amendment. Rule 18C.01 of the Listing Rules defines “Specialist Technology Industry” and “an acceptable sector of a Specialist Technology Industry” as an industry or an acceptable sector (as the case maybe) that is included in a list of Specialist Technology Industries set out in the guidance letter (appendix V of the Consultation Conclusions) published on the Stock Exchange’s website, as updated from time to time. The list of Specialist Technology Industries and the non-exhaustive acceptable sectors that the Stock Exchange considers to fall within each of these industries are set out as follows:

Specialist Technology Industry	Acceptable Sectors
Next-generation information technology	Cloud-based services; Artificial intelligence
Advanced hardware and software	Robotics and automation; Semiconductors; Advanced communication technology; Electric and autonomous vehicles; Advanced transportation technology; Aerospace technology; Advanced manufacturing; Quantum information technology and computing; Metaverse technology
Advanced materials	Synthetic biological materials; Advanced inorganic materials; Advanced composite materials; Nanomaterials
New energy and environmental protection	New energy generation; New energy storage and transmission technology; New green technology
New food and agriculture technologies	New food technology; New agriculture technology
Others - a pre-IPO enquiry must be submitted to HKEX in consultation with the Securities and Futures Commission.	The Stock Exchange may reject an application for listing if it displays attributes inconsistent with the following principles: 1. it has high growth potential; 2. its success is attributable to the application of new technologies and/or a new business model; and 3. Research and development (“R&D”) significantly contributes to its expected value and constitutes a major activity and expense

2. Qualifications for listing

A summary of the key differences between the consultation proposals and the requirements to be implemented is set out below:

Consultation Paper	Consultation Conclusions
1. Expected market capitalization at the time of listing
· Commercial Companies: ≥ HK$8 billion · Pre-Commercial Companies: ≥ HK$15 billion	· Commercial Companies: ≥ HK$6 billion · Pre-Commercial Companies: ≥ HK$10 billion (Rule 18C.03)
2. R&D expenditure ratio
Minimum R&D expenditure ratio threshold (amount of R&D expenses as a percentage of its total operating expenditure for the same period) · Commercial Companies: 15% · Pre-Commercial Companies: 50%	Minimum R&D expenditure ratio threshold (amount of R&D expenses as a percentage of its total operating expenditure for the same period) · Threshold lowered to 30% (for Pre-Commercial Companies with revenue ≥ HK$150 million but <HK$250 million (Rule 18C.04(2)(b)) · Threshold remained at 50% (for Pre-Commercial Companies with revenue < HK$150 million) (Rule 18C.04(2)(c))
Period of application · Each of the three financial years prior to listing	Period of application Require the ratio to be met: · (a) on a yearly basis for at least two of the three financial years prior to listing (Rule 18C.04(3)(a)); and · (b) on an aggregate basis over all three financial years prior to listing (Rule 18C.04(3)(b)).
3. Meaningful investment from pathfinder sophisticated independent investors (“Pathfinder SIIs”)
Indicative benchmark for the investment from Pathfinder SIIs · At least two Pathfinder SIIs, each holding ≥ 5% of an applicant’s issued share capital as at the date of listing application and throughout the pre-application 12 month period	Indicative benchmark for the investment from Pathfinder SII Two to five Pathfinder SIIs that: · in aggregate hold ≥ 10% of an applicant’s issued share capital as at the date of listing application and throughout the pre-application 12-month period; or · otherwise have invested an aggregate sum of ≥ HK$1.5 billion in the applicant at least 12 months prior to the date of listing application (excluding any subsequent divestments made on or before the date of the listing application); Provided that at least two such Pathfinder SIIs: · each hold ≥ 3% of an applicant’s issued share capital as at the date of listing application and throughout the pre-application 12-month period; or · otherwise each have invested ≥ HK$450 million in the applicant at least 12 months prior to the date of listing application (excluding any subsequent divestments made on or before the date of the listing application). (Paragraph 37 of the Guidance Letter)
4. Optimised price discovery process
· Require ≥ 50% of the total number of shares offered in the initial public offering (excluding any shares to be issued pursuant to the exercise of any over-allotment option) to be taken up by “Independent Institutional Investors” · Define “Independent Institutional Investors” as Institutional Professional Investors that satisfy the independence requirement	· Require ≥ 50% of offer shares to be taken up by “Independent Price Setting Investors”(Rule 18C.08) · Define “Independent Price Setting Investors” to comprise (i) Institutional Professional Investors (as defined in Rule 18B.01); and (ii) other types of investors with AUM, fund size or investment portfolio size of at least HK$1 billion that satisfy the same independence requirement (Paragraph 55 of the Guidance Letter)

Consultation Paper

Consultation Conclusions

1. Expected market capitalization at the time of listing

· Commercial Companies: ≥ HK$8 billion

· Pre-Commercial Companies: ≥ HK$15 billion

· Commercial Companies: ≥ HK$6 billion

· Pre-Commercial Companies: ≥ HK$10 billion

(Rule 18C.03)

2. R&D expenditure ratio

Minimum R&D expenditure ratio threshold (amount of R&D expenses as a percentage of its total operating expenditure for the same period)

· Commercial Companies: 15%

· Pre-Commercial Companies: 50%

Minimum R&D expenditure ratio threshold (amount of R&D expenses as a percentage of its total operating expenditure for the same period)

· Threshold lowered to 30% (for Pre-Commercial Companies with revenue ≥ HK$150 million but <HK$250 million (Rule 18C.04(2)(b))

· Threshold remained at 50% (for Pre-Commercial Companies with revenue < HK$150 million) (Rule 18C.04(2)(c))

Period of application

· Each of the three financial years prior to listing

Period of application

Require the ratio to be met:

· (a) on a yearly basis for at least two of the three financial years prior to listing (Rule 18C.04(3)(a)); and

· (b) on an aggregate basis over all three financial years prior to listing (Rule 18C.04(3)(b)).

3. Meaningful investment from pathfinder sophisticated independent investors (“Pathfinder SIIs”)

Indicative benchmark for the investment from Pathfinder SIIs

· At least two Pathfinder SIIs, each holding ≥ 5% of an applicant’s issued share capital as at the date of listing application and throughout the pre-application 12 month period

Indicative benchmark for the investment from Pathfinder SII

Two to five Pathfinder SIIs that:

· in aggregate hold ≥ 10% of an applicant’s issued share capital as at the date of listing application and throughout the pre-application 12-month period; or

· otherwise have invested an aggregate sum of ≥ HK$1.5 billion in the applicant at least 12 months prior to the date of listing application (excluding any subsequent divestments made on or before the date of the listing application);

Provided that at least two such Pathfinder SIIs:

· each hold ≥ 3% of an applicant’s issued share capital as at the date of listing application and throughout the pre-application 12-month period; or

· otherwise each have invested ≥ HK$450 million in the applicant at least 12 months prior to the date of listing application (excluding any subsequent divestments made on or before the date of the listing application).

(Paragraph 37 of the Guidance Letter)

4. Optimised price discovery process

· Require ≥ 50% of the total number of shares offered in the initial public offering (excluding any shares to be issued pursuant to the exercise of any over-allotment option) to be taken up by “Independent Institutional Investors”

· Define “Independent Institutional Investors” as Institutional Professional Investors that satisfy the independence requirement

· Require ≥ 50% of offer shares to be taken up by “Independent Price Setting Investors”(Rule 18C.08)

· Define “Independent Price Setting Investors” to comprise (i) Institutional Professional Investors (as defined in Rule 18B.01); and (ii) other types of investors with AUM, fund size or investment portfolio size of at least HK$1 billion that satisfy the same independence requirement (Paragraph 55 of the Guidance Letter)

Conclusion

The new rules set out in the new Chapter 18C of the Main Board Listing Rules together with the Guidance Letter for “Specialist Technology Companies” will come effect on 31 March 2023. The new listing regime is a valuable addition to the market’s development in Hong Kong and it is believed that the reduction in the minimum valuation will allow more companies to qualify under the new regime.

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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.