In a bid to capitalise on the economic potential of the fast-growing tech sectors, Hong Kong has rolled out new listing rules for specialist technology companies hoping to court the “firms of tomorrow” to raise capital in the recovering financial hub.  

Hit by a prolonged IPO slump induced by three years of strict pandemic curbs, Hong Kong has been struggling to get its magic back as a listing powerhouse. UAE, Indonesia, and Japan eclipsed the Asia financial hub in first quarter IPO proceeds this year, as more Chinese companies opt to look inwards by floating their shares in Shanghai, Beijing, or Shenzhen.

However, Nicolas Aguzin, the CEO of Hong Kong Exchanges and Clearings, remains unfazed, touting several new connections and schemes to bolster Hong Kong’s capability to attract capital. One of those schemes is the Special-ist Technology Company listing regime, which provides a new listing pathway for the rapidly growing tech sector, or as the HKEX put it, “the companies of tomorrow.”

With Aguzin bullish about the prospects of Hong Kong becoming “Asia’s premier biotechnology fundraising market,” the new listing rules in Chapter 18C of the Main Board Listing Rules cover five “specialist technology industries.”

Those industries range from next-generation information technology, including cloud-based services and artificial intelligence, to new energy protection and agriculture technologies. Companies under these categories will be eligible to apply for listing on the Hong Kong Stock Exchange (SEHK) even if falling short of existing financial track record requirements.

“The new regime significantly relaxes the amount of revenue a company must have to be eligible to list in Hong Kong, where that company is operating in a specialist technology business.

Specialist technology companies at the pre-commercial stage, who have not yet recorded any revenue, are now permitted to list. Previously, only pre-revenue biotech companies were permitted to list in Hong Kong,” explains Kai Sun, a corporate partner at Skadden, Arps, Slate, Meagher & Flom.

“In addition, specialist technology companies at the commercial stage, who have recorded revenue of at least HK$250 million [$32 million] for the most recent financial year, will also be permitted to list and will be subject to more relaxed rules compared with pre-commercial specialist technology com-panies,” Sun adds.

NOVEL MEASURES

Bosco Yiu, a corporate partner at Paul, Weiss, Rifkind, Wharton & Garrison, deems the absence of minimum profit requirement as the most significant pro-vision. In addition, “the minimum revenue requirement is half of that, which is under the ordinary regime for ‘commercial companies,’ and no minimum profit nor revenue requirement for ‘pre-commercial companies,” notes Yiu.

Yiu believes early-stage specialist tech companies will reap the most benefits from such a framework, especially those with a matured incubation with a solid investor base to support their undertakings in research and development.

“A Hong Kong IPO would expand their funding base to further their R&D efforts towards or enhance commercialisation,” he adds.

Furthermore, measures including the introduction of requirements regarding free or public float are also seen as something novel, according to Donnelly Chan, a corporate partner at Linklaters.

“Free float” refers to the shares of a company that can be publicly traded in secondary market, as opposed to restricted shares and closely held shares. The new listing regime requires a portion of the stock’s shares with certain market capitalisation value not to be subject to any disposal restrictions at the time of listing.

“We acknowledge the SEHK’s rationale of introducing this requirement, which is to ensure liquidity in the shares of specialist tech companies post-listing to aid price discovery for these companies where there are inherent difficulties to form a valuation, and also to ease market manipulation and price volatility concerns,” explains Chan.

“While the SEHK has decided not to adopt a percentage-based minimum free float requirement, the SEHK has indicated that it is reviewing the current requirements on public float and is finding ways to optimise the IPO price discovery process. These novel features in the regime may pave the way for wider implementation across all listings,” Chan adds.

TARGETING STAR

Lawyers believe the launch of the new listing regime aims to sharpen the comparative advantage of a traditionally popular listing venue intensely squeezed by the tech-heavy Shanghai STAR Market, which aspires to rival Nasdaq on Wall Street.

“The categories of specialist technology adopted by SEHK in formulating these rules were based on the existing categories under the STAR Market rules,” explains Paloma Wang, co-head of Skadden’s China practice.

As such, the new listing rules “do ensure that Hong Kong will remain competitive vis-à-vis other regional markets and be able to offer opportunities for various types of companies to access the capital markets in Hong Kong,” adds Wang.

John Moore, a capital markets partner at Slaughter and May, points out that some listing qualifications under the specialist tech regime are indeed more stringent than those of the STAR market, including higher market capitalisation thresholds and requirements on sophisticated independent investments.

However, “we expect Hong Kong’s unique mix of international investor base, market liquidity, and potential access to the Stock Connect schemes will make it an attractive option for emerging companies,” says Moore, adding that the new regime should burnish SEHK’s reputation as the regional face of innovation and the new economy.

“The new regime will enable the SEHK to capture the upcoming specialist tech listing candidates, and perhaps also attract those listed in foreign exchanges to migrate their listing or achieve a secondary listing in Hong Kong. This will enhance concentration of investors and funds in the Hong Kong capital markets as the regional fundraising hub.”
— Bosco Yiu, Paul, Weiss, Rifkind, Wharton & Garrison

Moore is pleased that companies falling outside the listed sectors may still be eligible to list if certain attributes, including high-growth potential, the use of new technology, and substantial R&D expenditure, are demonstrated. This flexibility is imperative for Hong Kong to shore up its competitiveness especially when markets such as Nasdaq are not restricted to an exhaustive list of sectors, Moore adds.

Yiu of Paul, Weiss also expects the new rules to lead to diversification of the Hong Kong bourse. “The new regime will enable the SEHK to capture the upcoming specialist tech listing candidates, and perhaps also attract those listed in foreign exchanges to migrate their listing or achieve a secondary listing in Hong Kong. This will enhance concentration of investors and funds in the Hong Kong capital markets as the regional fundraising hub,” he says.

IMPROVEMENTS NEEDED

While being stamped with plentiful votes of confidence, the 18C regime is not without areas where improvement is hoped for.

Yiu is wary that a rule regarding price-setting independent investors may undercut the regime’s application. “As the regime starts rolling, the SEHK should consider the market responses to the requirement that at least 50 percent of the total number of IPO shares be allocated to independent price setting investors, as similar requirement under the SPAC listing regime may have contributed to its relatively slow development,” he says.

Moore believes greater attention is needed when advising pre-commercial companies, whose commercial revenue is below HK$250 million, “to demonstrate, with evidence, a credible path to commercialising their specialist tech products and achieving the relevant commercialisation revenue threshold.”

Adds Yiu, “law firms can respond to the new regime by designating a speciality team with experience in investments and/or M&A in these early-stage specialist tech companies and members who have worked with the SEHK in earlier new listing regimes to facilitate an efficient process.”

Chan of Linklaters underscores the thorough understanding of the relevant technologies developed by the potential IPO applicant as instrumental in the listing process. Also, “law firms with capabilities in advising pre-IPO investments would also be well placed to serve potential applicants who will need to secure pathfinder sophisticated independent investors,” he adds.