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Hong Kong Eases Listing Path for Specialist Technology CompaniesApril 6, 2023
On October 19, 2022, The Stock Exchange of Hong Kong Limited (the “Exchange”) published a consultation paper proposing a new listing regime for Specialist Technology Companies (as defined below) (the “Consultation Paper”) to lower the threshold for such companies to list in Hong Kong.
On March 24, 2023, the Exchange published the consultation conclusions after considering market feedback. The Consultation Paper introduced amendments to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (the “Listing Rules”) (including the addition of a new Chapter 18C to the Listing Rules (“Chapter 18C”)). Relevant amendments to the Listing Rules came into effect on March 31, 2023. Companies wishing to list under Chapter 18C may submit formal applications from that date onwards.
The introduction of Chapter 18C is another notable reform of the listing regime in Hong Kong. In 2018, the Exchange adopted Chapter 18A of the Listing Rules (“Chapter 18A”), which allows pre-revenue life science and biotech companies to list in Hong Kong. The new Chapter 18C aims to attract Specialist Technology Companies around the world to list in Hong Kong, thereby strengthening the Hong Kong capital market and providing an avenue for financing for Specialist Technology Companies. This article summarizes the eligibility requirements for listing applicants under Chapter 18C and outlines potential issues for prospective listing applicants and investors.
2. What are Specialist Technology Companies?
Specialist Technology Company: a company primarily engaged in the research and development of, and the commercialization and/or sales of, Specialist Technology Product(s) within an acceptable sector of a Specialist Technology Industry.
Specialist Technology Industries generally comprise the following five categories1:
| Specialist Technology Industries and the Acceptable Sectors
|Next-generation Information Technology|
|Software, platform and infrastructure solutions powered by cloud computing and big data analytics|
| Advanced Hardware and Software
| The development of new hardware and software using advanced technology
| Advanced Materials
| The production or integration of new or significantly improved materials to enhance the performance of traditional materials
| New Energy and Environmental Protection
| The production of energy from natural sources and the development of networks and infrastructure to support such production and other processes for improving environmental sustainability and resource use and/or energy efficiency
| New Food and Agriculture Technologies
| Food and agriculture technologies applied to agriculture, farming and food processing activities
A listing applicant falling outside the definition of “Specialist Technology Industries” as set out above may still be considered as “within an acceptable sector of a Specialist Technology Industry” and list under Chapter 18C if it can demonstrate that:
- 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 the relevant science and/or technology within that sector to a new business model, which differentiates it from traditional market participants serving similar consumers or end-users; and
- research and development significantly contributes to its expected value and constitutes a major activity and expense.
Such listing applicant is required to submit a pre-IPO enquiry to the Exchange to seek confidential guidance on whether it can be considered as “within an acceptable sector of a Specialist Technology Industry” before submitting a listing application under Chapter 18C.
3. Distinction between a Commercial Company and a Pre-Commercial Company
Chapter 18C distinguishes between a Commercial Company and a Pre-Commercial Company. A Commercial Company is a Specialist Technology Company that has achieved meaningful commercialization of its Specialist Technology Product, as indicated by meeting the minimum revenue requirement of HK$250 million from its specialist technology business segment for the most recent audited financial year. A Pre-Commercial Company is a Specialist Technology Company that primarily engages in R&D to bring its Specialist Technology Products to commercialization but has not achieved the said revenue threshold. The specific listing requirements for a Commercial Company and a Pre-Commercial Company are discussed in further detail below.
4. Conditions for Listing
After considering market feedback during the consultation period of the Consultation Paper, the Exchange made amendments to certain proposals in the Consultation Paper as reflected in the final new rules. For example, the minimum market capitalization requirements of HK$8 billion for Commercial Companies and HK$15 billion for Pre-Commercial Companies have been lowered to HK$6 billion for Commercial Companies and HK$10 billion for Pre-Commercial Companies respectively. If listing applicants are unable to satisfy either the profit test, the market capitalization/revenue/cash flow test or the market capitalization/revenue test in Rule 8.05 of the Listing Rules, those seeking to list under Chapter 18C must demonstrate that they satisfy the definition of a Specialist Technology Company set out above and the following conditions:
|Commercial Companies||Pre-Commercial Companies|
|Expected market capitalization
||At least HK$6 billion
||At least HK$10 billion
||Revenue of at least HK$250 million for its most recent audited financial year arising from its specialist technology business segment
Generally, a Commercial Company must demonstrate a year-on-year growth of revenue throughout its track record period, with allowance for temporary declines in revenue as the Exchange may consider on a case-by-case basis
||Having been in operation in its current line of business for at least three financial years prior to listing under substantially the same management|
|Ownership continuity||Ownership continuity and control in the 12 months prior to the date of the listing application and up until the time immediately before the offering and/or placing becomes unconditional
|R&D expenditure ratio
||(i) The annual R&D expenditure ratio of at least two of the three financial years prior to the listing, and (ii) the total R&D expenditure ratio over the three years prior to the listing is at least:
at least 15% for Pre-Commercial Companies with revenue of at least HK$150 million but less than HK$250 million: ≥ 30%
for Pre-Commercial Companies with revenue of less than HK$150 million: ≥ 50%
|Investment from Pathfinder SIIs:||Investment from a group of two to five Sophisticated Independent Investors (as defined below) who have invested in the Specialist Technology Company at least 12 months before the date of the listing application (“Pathfinder SIIs”) that satisfy the following:
provided that at least two such Pathfinder SIIs satisfy either of the following:
The timing of the investment by the Pathfinder SIIs should be determined by reference to the date of the irrevocable settlement. The Exchange may accept fluctuations in the shareholding of the Pathfinder SIIs considering all the relevant circumstances of a particular case. Non-exhaustive examples where such fluctuations may be accepted include:
(ii) where the Pathfinder SIIs’ shareholding is diluted due to investments made by other investors during the pre-application 12-month period, the relevant Pathfinder SII has committed irrevocably to top up its investment before the listing application by an amount that would have resulted in the Pathfinder SIIs meeting the relevant indicative benchmark as at the date of the listing application had such top-up been completed, and the top-up will be completed before the date of listing.
The requirements for Sophisticated Independent Investors are set out in further detail in paragraph 5 below.
|Minimum investment from Sophisticated Independent Investors||Expected market capitalization at the time of listing (HK$)||Minimum total investment from all Sophisticated Independent Investors (as a percentage of the issued share capital, prior to the exercise of any over-allotment option) at the time of listing||Expected market capitalization at the time of listing (HK$)||Minimum total investment from all Sophisticated Independent Investors (as a percentage of the issued share capital, prior to the exercise of any over-allotment option) at the time of listing|
|≥ 30 billion
||10%||≥ 30 billion||15%|
|≥ 15 billion to < 30 billion
||15%||≥ 15 billion to < 30 billion||20%|
|≥ 6 billion to < 15 billion
||20%||≥ 10 billion to < 15 billion||25%|
|Special stock name||N/A||A stock name that ends with the marker “P”|
Under Chapter 18C, additional conditions for Pre-Commercial Companies include:
- To disclose a credible path to achieve the commercialization revenue threshold: a Pre-Commercial Company must demonstrate and disclose in its listing documents a credible path to achieving the commercialization revenue threshold. Some examples of a credible path to achieving the revenue requirement of a Commercial Company include:
- binding contracts or non-binding framework agreements, with reasonably sufficient details on the timeframe and milestones for commercialization, in respect of the Specialist Technology Product(s) that the company has in place; and
- such binding contracts or non-binding framework agreements being arranged with a reasonable number of independent customers for the development, testing or sales of the Specialist Technology Product(s), with a substantial potential aggregate contract value realizable within 24 months from the date of listing. The Exchange may, under exceptional circumstances, accept that a credible path is demonstrated by a binding contract or non-binding framework agreement with an expected timeframe of more than 24 months, in which case an independent customer engaged in such arrangement must also be a highly reputable customer.3
- Sufficient working capital: a Pre-Commercial Company must ensure that it has available sufficient working capital to cover at least 125% of its group’s costs (which must substantially consist of general, administrative and operating costs (including any production costs) and research and development costs) for at least 12 months in the future (after taking into account the expected proceeds of the initial public listing); and
- Use of proceeds: a Pre-Commercial Company must have as its primary reason for listing the raising of funds for the research and development of, and the manufacturing and/or sales and marketing of, its Specialist Technology Product(s) to bring them to commercialization and achieving the revenue threshold as required under Chapter 18C.
5. Investor Requirement: An applicant applying for listing under Chapter 18C must have received meaningful investment from sophisticated independent investors (“Sophisticated Independent Investors”).5.1. Independence
The following persons will not be considered as Sophisticated Independent Investors for the purpose of Rule 18C.05 of the Listing Rules:
- core connected person(s) of the listing applicant4;
- controlling shareholder(s) of the listing applicant; and
- the founder(s) of the listing applicant and their respective close associates.
The Exchange retains the discretion to deem any other person not independent for the purpose of Rule 18C.05 of the Listing Rules based on the facts and circumstances of each individual case. For example, a person who acts in concert with the three classes of individuals mentioned above will not be considered as independent.5.2. Sophistication
The Exchange would generally consider the following as examples, for illustrative purposes only, of the types of investors that would be considered sophisticated:
- an asset management firm with assets under management (“AUM”) of, or a fund with a fund size of, at least HK$15 billion;
- a company having a diverse investment portfolio size of at least HK$15 billion;
- an investor of any of the types above with AUM, fund size or investment portfolio size (as applicable) of at least HK$5 billion where that value is derived primarily from Specialist Technology investments; or
- a key participant in the relevant upstream or downstream industry with a meaningful market share and size, as supported by appropriate independent market or operational data.
6. Initial Public Offering Considerations6.1. Allocation of Shares
Chapter 18C introduced the concept of “Independent Price Setting Investors”. At least 50% of the total number of shares offered in the initial public offering (excluding over-allotment shares) of a Specialist Technology Company must be taken up by Independent Price Setting Investors in the placing tranche. Independent Price Setting Investors can be cornerstone investors. Independent Price Setting Investors are defined to be Institutional Professional Investors (i.e., persons falling under paragraphs (a) to (i) of the definition of “professional investor” in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance) and other types of independent investors with AUM, fund size or investment portfolio size of at least HK$1 billion. The definition of Independent Price Setting Investors does not include existing shareholders (or their close associates) or core connected persons of a Specialist Technology Company.
The initial share allocation percentage and clawback mechanism under Chapter 18C are also different from a traditional Hong Kong public offering. Retail investors in Hong Kong will initially be allocated no less than 5% of the total number of shares offered in the initial public offering of a Specialist Technology Company. In the event of an over-subscription, no less than 10% (assuming an over-subscription of 10 times to less than 50 times) or no less than 20% (assuming an over-subscription of 50 times or more) of the total number of shares will be reallocated to the Hong Kong public offering tranche to satisfy the demand of the retail investors.6.2. Minimum Free Float Requirement
Specialist Technology Companies are still required to satisfy the minimum public float requirement under Rule 8.08 of the Listing Rules (that is, at least 25% of the issuer’s total number of issued shares must at all times be held by the public, and not more than 50% of the securities in public hands at the time of listing can be beneficially owned by the three largest public shareholders).
Besides, with reference to the minimum HK$375 million free float requirement for biotech issuers under Chapter 18A, the Exchange has also put in place a particular free float requirement for Specialist Technology Companies. A Specialist Technology Company must ensure that a portion of the total number of its issued shares with a market capitalization of at least HK$600 million is not subject to any disposal restrictions (whether under contract, the Listing Rules, applicable laws or otherwise) at the time of listing (as discussed in further detail in paragraph 7 below).6.3. Participation in the IPO by Existing Shareholders
With reference to the current rules under Chapter 18A, existing shareholders may participate in the IPO of a Specialist Technology Company if the following conditions are satisfied: an existing shareholder holding less than 10% of shares may participate in the IPO of a Specialist Technology Company as either a cornerstone investor or as a placee, while an existing shareholder holding 10% or more of shares may participate in the IPO of a Specialist Technology Company as a cornerstone investor only.
7. Lock-up periods
||The restrictions commence on||The restrictions end upon the expiry of the following period
|Commercial Companies||Pre-Commercial Companies|
|Controlling shareholder(s) and their respective close associates||The date by reference to which disclosure of their respective shareholdings is made in the listing document||12 months following the listing||24 months following the listing|
|Key persons and their respective close associates, key persons include:
|12 months following the listing
||24 months following the listing
|Such existing investors in a Specialist Technology Company as identified by the Exchange in guidance published, as amended from time to time||Six months following the listing||12 months following the listing|
8. Additional Continuing Obligations for Pre-Commercial Companies
A Pre-Commercial Company must include in its interim (half yearly) and annual reports details of its research and development and commercialization activities during the period under review, including:
- details of the development progress of its Specialist Technology Product(s) under development;
- the timeframe for, and any progress made towards, achieving the revenue requirement as set out in Chapter 18C, including updates on the information previously disclosed to demonstrate the path to achieving such revenue requirement in its listing document or any subsequent update as published by the Pre-Commercial Company;
- updates on any revenue, profit and other business and financial estimates as provided in the listing document and any subsequent update to those estimates as published by the Pre-Commercial Company;
- a summary of expenditure on its research and development activities; and
- a prominently disclosed warning that it may not achieve the revenue requirement as set out in Chapter 18C.
9. Others9.1. Removal of Designation as a Pre-Commercial Company
A Pre-Commercial Company that wishes to cease being regarded as a Pre-Commercial Company after listing must make an application to the Exchange for that purpose if it has met the revenue requirement of HK$250 million, and it must provide the Exchange with published audited financial statements demonstrating that:
- for its most recent audited financial year, it has met the revenue requirement as set out in Chapter 18C; or
- as a result of its operations as a whole, it has met at least one of the tests in Rule 8.05 of the Listing Rules.
After such application is approved, the company must announce matters regarding the removal of designation as a Pre-Commercial Company. The lock-up periods applicable to the company applying for listing as a Pre-Commercial Company under Chapter 18 would be shortened to end on the later of: (i) the date on which such lock-up periods would have ended if the company had applied for listing as a Commercial Company; and (ii) the date falling on the 30th day after its announcement on the removal of designation as a Pre-Commercial Company as required under Chapter 18C.
9.2. Companies with Multiple Business Segments
Where an applicant has multiple business segments, some of which do not fall within one or more acceptable sectors of the Specialist Technology Industries, the Exchange will, for the purpose of determining whether the company is “primarily engaged” in the relevant business (as referred to in the definition of Specialist Technology Company), take into account the following factors:
- whether a substantial portion of the total operating expenditure of the company and staff resources (including their time and the number of staff with relevant expertise and experience) was spent on the research and development of, and the commercialization and/or sales of, Specialist Technology Products in the company’s Specialist Technology business segment(s) for at least three financial years prior to listing;
- whether the basis for investors’ valuation and the expected market capitalization of the company is based primarily on the company’s Specialist Technology business segment(s), rather than its other business segments or assets unrelated to its Specialist Technology business segment(s);
- whether the proposed use of proceeds for listing would primarily be applied to its Specialist Technology business segment(s);
- the proportion of the revenue (if any) generated by the Specialist Technology business segment(s) relative to the total revenue of the company; and
- the reason for retaining the non-Specialist Technology business segment(s) and the history of the company’s operations.
A Biotech Company (as defined in Chapter 18A) relying on a Regulated Product (as defined in Chapter 18A) as the basis of its listing application must submit an application under Chapter 18A (and the relevant guidance) instead of Chapter 18C. A Biotech Company that fails to satisfy the requirements under Chapter 18A (and the relevant guidance) is not permitted to submit an application under Chapter 18C. A company in the biotech industry that does not base its listing application on a Regulated Product may apply to list under Chapter 18C as long as it meets the definition of a Specialist Technology Company.9.4. Specialist Technology Companies with a weighted voting rights (“WVR”) Structure
An applicant that is a Specialist Technology Company with a WVR Structure is required to meet the requirements under Chapter 8A of the Listing Rules, including (i) a minimum market capitalization of HK$40 billion, or (ii) a minimum market capitalization of HK$10 billion and revenue of HK$1 billion for the most recent audited financial year.9.5. Time
The new Chapter 18C has come into effect on March 31, 2023. Listing applicants may submit relevant listing applications under Chapter 18C from March 31, 2023 onwards.
We believe that Chapter 18C is the biggest milestone for Hong Kong’s capital market since the adoptation of Chapter 18A by the Exchange. The new economy is rapidly changing the way we live and work, and the new listing regime introduced by the Exchange will make it easier for a new generation of innovative companies to access the Hong Kong capital market. The introduction of Chapter 18C will open a new financing route for Specialist Technology Companies, which will support their capital and financing requirements and the implementation of innovative ideas.
1 It is a non-exhaustive list and may be updated by the Exchange from time to time.
2 For example, due to economic, market or industry-wide conditions, or other factors which were temporary and outside of the listing applicant’s control.
3 That is, a key market participant in the relevant upstream or downstream industry with meaningful market share and size, as supported by appropriate independent market or operational data; or a State or State corporation as defined under the Listing Rules.
4 Provided that a Sophisticated Independent Investor who is a substantial shareholder of the listing applicant can be considered as a Sophisticated Independent Investor if it is a core connected person only because of the size of its shareholding in the listing applicant.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ke Geng, an O’Melveny partner licensed to practice law in New York, Edwin Kwok, an O’Melveny partner licensed to practice law in Hong Kong, Ke Zhu, an O’Melveny partner licensed to practice law in Hong Kong and New York, Portia Ku, an O’Melveny partner licensed to practice law in New York, California, Hong Kong, and Taiwan, Vincent Lin, an O’Melveny partner licensed to practice law in New York, Hong Kong, and Taiwan, and Ye Sun, an O’Melveny partner licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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