Specialist tech firms to gain major boost in HK thanks to proposed listing rules

The new regime exempts firms from existing financial eligibility tests under the Listing Rules.

Innovative technology companies in need of funding would often turn away from Hong Kong due to its high-profit threshold for listing and opt for other markets instead. This has affected the city’s competitiveness as a listing venue of choice for these high-growth firms.

To regain its attractiveness and improve fundraising activities, Hong Kong has proposed a new regime where innovative or specialist technology companies will be exempt from existing financial eligibility tests under the Listing Rules.

According to Claudia Yiu, Partner, Corporate & Commercial, at Simmons & Simmons Hong Kong, specialist tech firms include those involved in next-generation information technology, advanced hardware, advanced materials, new energy and environmental protection, and new food and agriculture technologies, amongst others.

Under the new regime, specialist tech firms are categorised into two using a commercial revenue threshold of $250m. Companies that meet the threshold will fall under the “commercial” category, whilst firms that fail to do so will be identified as “pre-commercial” or those which have yet to generate meaningful revenue.

“Commercial companies are those specialist technology companies that have achieved meaningful commercialisation of their products; whereas precommercial companies are those that are primarily engaged in R&D to bring their products to commercialisation,” Louis Lau, Partner at KPMG China’s Capital Markets Advisory Group, told Hong Kong Business.

Stringent requirements

Since pre-commercial specialist technology firms do not meet the threshold, they will be subjected to more stringent requirements like higher minimum expected market capitalisation at listing of $15b. To compare, firms categorised as commercial’s minimum expected market capitalisation at listing is only $8b.

Pre-commercial firms will also need to meet a higher proportion of operating expenditure in research and development (R&D) of 50% of total operating expenditure, rather than 15%. “Pre-commercial specialist technology companies are also required to, amongst other things, demonstrate a credible path to commercialisation, and after listing, to comply with enhanced continuing obligations that are consistent with those imposed on biotech company listings under Chapter 18A,” added Christopher Ma, Partner, Corporate & Commercial, at Simmons & Simmons Hong Kong.

Lau said additional or more stringent requirements are applied to pre-commercial companies due to the higher risks associated with it. Whilst there are differences, there are a number of requirements imposed on both types of specialist technology companies.

The first of these common requirements is that they should “fall within the definition of specialist technology company as defined by the Hong Kong Exchanges and

This will enhance the competitiveness of HK as a listing venue

Clearing (HKEX) from time to time.” Ma said external validation in the form of meaningful third-party investment is also required for both company types.

An example of a meaningful investment is funding from an asset management firm with assets under management (AUM) of at least $15b or key players in upstream or downstream industries.

“There is also an additional free float requirement at listing, which stipulates a minimum market capitalisation of $600m to be free from any disposal restrictions, contractual or otherwise,” said Ma.

Enhanced disclosure requirements and a more robust price discovery process are also imposed on both commercial and pre-commercial companies.

“In particular, the initial allocation and clawback mechanism mandate a higher level of participation from institutional investors as compared with normal listings, with a corresponding reduction in retail participation, with a minimum of 20% retail allocation upon oversubscription of 50 times or more in the public subscription tranche,” Yiu explained.

Enhancing competitiveness

The flexibility offered by the proposed listing rules will allow capital markets to channel much-needed funds into innovative technology companies, according to Lau.

“By expanding the range of companies that can access Hong Kong’s deep, liquid, international markets, this will also offer more investment options for investors, enhancing the competitiveness of the Hong Kong market as a listing venue of choice for innovative companies,” Lau added.

Simmons & Simmons’ Ma had a similar sentiment, saying that increasing the number of innovative companies listed in Hong Kong would help diversify and expand the market offering and present more choices for investment, and would also increase the fundraising activities and trading volume on the Stock Exchange of Hong Kong.