On March 24, 2023, the Stock Exchange of Hong Kong Limited (the “Exchange”) issued the long-awaited consultation conclusions (the “Consultation Conclusions”) on the listing regime for Specialist Technology Companies on the Main Board under the new Chapter 18C, three months after the expiry of the two-month consultation period with over 90 responses from market participants. The new Chapter 18C, together with the Guidance Letter on Specialist Technology Companies, will come into effect on March 31, 2023. Formal listing applications under the new regime may be made on or after March 31, 2023.

The Exchange has made several important concessions in the Consultation Conclusions in response to market comments on the proposed requirements for market capitalization, research and development (R&D) expenditure ratio, investments from sophisticated independent investors (SIIs), and minimum allocation to independent institutional investors.

• Market capitalization: The minimum expected market capitalization requirement at listing has been lowered from HK$8 billion to HK$6 billion for Commercial Companies and from HK$15 billion to HK$10 billion for Pre-Commercial Companies.
• R&D expenditure ratio: The initial proposal required Commercial Companies and Pre-Commercial Companies to have invested at least 15% and 50% of total operating expenditure, respectively, on the R&D of their specialist technology products for each of the three financial years prior to listing. For Pre-Commercial Companies, the Exchange has set an alternative R&D expenditure threshold of 30% for those with revenue of at least HK$150 million but less than HK$250 million for the most recent audited financial year. Furthermore, the Exchange has revised the period of application to require that Specialist Technology Companies meet the applicable ratio (1) on a yearly basis for at least two of the three financial years prior to listing and (2) on an aggregate basis over all three financial years prior to listing.
• Investments from Pathfinder SIIs: The Exchange initially required all applicants to have received meaningful investments from at least two Pathfinder SIIs (“Pathfinder SIIs”), each holding shares or convertible securities equivalent to at least 5% of an applicant’s issued share capital as at the listing application date and throughout the pre-application 12-month period. In order to provide more flexibility, the Exchange has introduced an alternative two-limb benchmark which requires (a) two to five Pathfinder SIIs holding shares or convertible securities equivalent to at least 10% of the issued share capital as at the listing application date and throughout the pre-application 12-month period or having invested at least HK$1.5 billion at least 12 months prior to the listing application date (any subsequent divestments made on or before the listing application shall be excluded); and (b) at least two such Pathfinder SIIs each holding shares or convertible securities equivalent to at least 3% of the issued share capital as at the listing application date and throughout the pre-application 12-month period or having invested at least HK$450 million at least 12 months prior to the listing application date (any subsequent divestments made on or before the listing application shall be excluded). 
• Minimum allocation to independent institutional investors: The Exchange has expanded the types of independent institutional investors qualified to satisfy the minimum share allocation requirement. In addition to independent institutional professional investors,[1] offer shares taken up by other types of independent investors with AUM, fund size, or investment portfolio size of at least HK$1 billion can satisfy the requirement. These investors (“Independent Price Setting Investors”) must take up at least 50% of the applicant’s offer shares.

The following is a recap of the major requirements under the new Chapter 18C (with changes to the consultation proposals noted in bold and italic).

What Are Specialist Technology Companies? 

A Specialist Technology Company is a company primarily engaged (whether directly or through its subsidiaries) in the research and development of, and the commercialization and/or sales of, products and/or services (alone or with other products or services) that apply science and/or technology within an acceptable sector of a Specialist Technology Industry. The initial list of Specialist Technology Industries proposed by the Exchange is as follows:

Specialist Technology Companies will be divided into Commercial Companies (those which that have achieved meaningful commercialization of their specialist technology products as indicated by their revenue achieving the minimum threshold) and Pre-Commercial Companies (those which are primarily engaged in R&D to bring their specialist technology products to commercialization or have not yet achieved the minimum revenue threshold).

Qualifications for Listing

• Revenue threshold – Commercial Companies are defined as those that have at least HK$250 million revenue arising from their specialist technology business segment for the most recent audited financial year. No such requirement applies to Pre-Commercial Companies but they must have a high expected market capitalization.
• Minimum expected market capitalization at listing – HK$6 billion (Commercial Companies) and HK$10 billion (Pre-Commercial Companies).
• R&D – All applicants must have been engaged in R&D to develop their specialist technology product(s) for at least three financial years prior to listing, with R&D investment amounting to at least 15% of total operating expenditure for Commercial Companies, 30% for Pre-Commercial Companies with revenue of at least HK$150 million but less than HK$250 million for the most recent audited financial year and 50% for Pre-Commercial Companies with revenue of less than HK$150 million for the most recent audited financial year for (a) two of the three financial years and (b) three financial years in aggregate.
• Minimum operational track record – All applicants must have been in operation in their current line of business for at least three financial years prior to listing.
• Management and ownership continuity – All applicants must have management continuity for three financial years up to listing and ownership continuity and control for the most recent audited financial year up to listing.
• Third-party investment – All applicants must have received meaningful investment from SIIs, meaning:
  • Two to five Pathfinder SIIs must be holding shares or convertible securities equivalent to at least 10% of the issued share capital as at the listing application date and throughout the pre-application 12-month period or must have invested at least HK$1.5 billion at least 12 months prior to the listing application date;
  • At least two such Pathfinder SIIs must have invested and each must be holding shares or convertible securities equivalent to at least 3% of the issued share capital as at the listing application date and throughout the pre-application 12-month period or must have invested at least HK$450 million at least 12 months prior to the listing application date; and
  • There must be at least a minimum aggregate investment (including any subscription at the IPO) from all SIIs as a percentage of issued share capital of the applicant at the time of listing ranging from 10% to 20%  for Commercial Companies or 15% to 25% for Pre-Commercial Companies, depending on the applicant’s expected market capitalization at listing.

• Working capital requirement – Pre-Commercial Companies should have available working capital (including IPO proceeds) to cover at least 125% of the costs for at least 12 months from listing which must substantially consist of general, administrative and operating costs, and R&D costs). No such requirement applies to Commercial Companies.

IPO requirements

• Initial allocation and clawback mechanism – Initial allocation of 5% to the public tranche and clawback of 10%, if the public tranche is 10 to 50 times over-subscribed; and clawback of 20%, if the public tranche is over 50% subscribed. At least 50% of the total shares offered in the IPO (excluding the over-allotment option) must be placed to Independent Price Setting Investors (meaning independent institutional professional investors (i.e., excluding corporate professional investors and individual professional investors) and investors with AUM of at least HK$1 billion, whether as cornerstone investors or otherwise but excluding existing shareholders or any of their close associates, and core connected persons).
• Free float – The free float must be at least HK$600 million upon listing. Free float means shares which are free from any lock-up (whether under law, rules, contract, or otherwise). The public float (generally at least 25% of the total issued share capital to be held by the public) remains unchanged.
• Offer size – The Exchange retains discretion regarding the offer size. If the offer size is not meaningful or significant enough to facilitate price discovery, the Exchange may not approve the listing.
• Disclosure requirements – Additional disclosures are required for, but are not limited to, pre-IPO investments and cash flows, products and commercialization status and prospects, industry-specific information, intellectual property, and appropriate warning statements. Pre-Commercial Companies should also disclose the key stages and milestones for achieving the commercialization revenue threshold (HK$250 million for the most recent audited financial year from the specialist technology segment).

Post-IPO requirements

• Lock-ups – Generally, controlling shareholders, key persons (e.g., founders, WVR beneficiaries, executive directors and senior management, and key personnel responsible for the technical operations and R&D of the specialist technology products) are subject to a 12-month lock-up (for Commercial Companies) or a 24-month lock-up (for Pre-Commercial Companies). Pathfinder SIIs are subject to a 6-month lock-up (for Commercial Companies) and a 12-month lock-up (for Pre-Commercial Companies). However, the lock-up period for Pre-Commercial Companies which achieve the commercialization revenue threshold will expire at the later of (a) the date on which the lock-up period would have expired had it applied for listing as a Commercial Company and (b) the 30th day after the announcement of the removal of the designation as a Pre-Commercial Company.
• Stock marker – The stock codes for Pre-Commercial Companies will end with “P”.

We welcome the introduction of a new listing regime for Specialist Technology Companies by the Exchange which takes into account the market’s comments on the consultation proposals. We believe that the revised rules will encourage more eligible Specialist Technology Companies to choose Hong Kong as their listing destination and will increase the competitiveness and attractiveness of the Hong Kong Stock Exchange to both issuers and investors.

[1] The definition of professional investors follows section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong.

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