The Hong Kong Stock Exchange (HKEx) announced on March 24, 2023 that eligible specialist technology companies (STCs) at the pre-commercial or early commercial stage can apply for listing on the HKEx under the new Chapter 18C of the Main Board Listing Rules to come into effect on March 31, 2023. The new regime significantly lowers the existing revenue thresholds in the Main Board Listing Rules for qualified STCs, aiming to drive growth in talent and investment across five frontier industries to attract high-growth, emerging, and innovative technology enterprises to list in Hong Kong.

The consultation paper released by the HKEx late last year attracted responses from a broad range of market participants, and the much-anticipated STC listing route as discussed in the consultation paper received overwhelming support. In response to the market feedback, the HKEx has substantially lowered the originally proposed thresholds for market capitalisation and relaxed the research and development (R&D) expenditure ratio.

Key requirements for STCs under the new Chapter 18C are discussed below.

SPECIALIST TECHNOLOGY INDUSTRIES AND ACCEPTABLE SECTORS

An STC is a company primarily engaged in the R&D of, and the commercialisation and/or sales of, products and/or services that apply science and/or technology within an acceptable sector of a specialist technology industry recognised by the HKEx and updated from time to time (Specialist Technology Industry).

Chapter 18C identifies five initial Specialist Technology Industries which are further divided into 19 acceptable sectors, as summarised in the table below (and which may be updated by HKEx):

An applicant falling outside the list of Specialist Technology Industries or acceptable sectors above may still be considered as “within an acceptable sector of a Specialist Technology Industry” for the purpose of the definitions of STC if it can demonstrate, among other things, its high growth potential, its success being attributable to application of science and new technologies, and that R&D significantly contributes to its expected value and constitutes a major activity and expense. Such applicant must submit a pre-initial public offering (IPO) enquiry to the HKEx 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 the new Chapter 18C.

FINANCIAL REQUIREMENTS FOR COMMERCIAL AND PRECOMMERCIAL STC

STCs are divided into Commercial Companies and Pre-Commercial Companies based on the Commercialisation Revenue Threshold (as defined below). An STC applying for listing under the new Chapter 18C must demonstrate that it is both eligible and suitable for listing as either a Commercial Company or a Pre-Commercial Company.

Chapter 18C sets distinct financial eligibility tests for the two categories of STCs. A Commercial Company shall have revenue of at least HK$250 million for its most recent audited financial year (Commercialisation Revenue Threshold) arising from its specialist technology business segment, with an expected market capitalisation at listing being at least HK$6 billion. A Pre-Commercial Company, while with no revenue requirement, is required to meet a higher market capitalisation threshold with an expected market capitalisation at listing of at least HK$10 billion.

The table below sets out a comparison between the key financial requirements under Chapter 18C for STCs and Chapter 8 for applicants seeking listing through the conventional route:

OPERATIONAL TRACK RECORD AND MANAGEMENT CONTINUITY, AND OWNERSHIP CONTINUITY

An STC needs to be in operation in its current line of business for at least three financial years prior to listing under substantially the same management. A shorter trading record period may be acceptable in exceptional circumstances.

An STC needs to demonstrate 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. Waivers may be granted by the HKEx on a case-by-case basis.

R&D EXPENDITURE RATIOS AND WORKING CAPITAL

Chapter 18C requires STCs to have engaged in R&D of Specialist Technology Product(s) for at least three financial years prior to listing and reach the R&D expenditure ratio thresholds as set forth in the table below:

* The R&D expenditure ratio is calculated as the total amount of an applicant’s expenditure on the R&D of its Specialist Technology Product(s) incurred for the relevant period, divided by its total operating expenditure for the same period.

Further, Chapter 18C sets the same working capital requirement as in Chapter 8 for Commercial Companies that it must ensure that its available sufficient working capital covers at least 100% of its costs for at least 12 months from the date of publication of its listing document (which is typically its prospectus). Pre-Commercial Companies need to meet a higher threshold to ensure that their available sufficient working capital covers at least 125% of their costs for at least 12 months from the date of publication of its listing document.

THIRD-PARTY INVESTMENTS

Chapter 18C requires an STC to have received meaningful investments from a group of two to five Sophisticated Independent Investors (SIIs) (each having invested in the listing applicant at least 12 months before the date of the listing application), known as “Pathfinder SIIs” that satisfy the following:

• Such investors in aggregate, (1) hold such amount of shares or securities convertible into shares equivalent to 10% or more of the issued share capital of the listing applicant as of the date of its listing application and throughout the preapplication 12-month period; or (2) have otherwise invested an aggregate sum of at least HK$1.5 billion in the shares or securities convertible into shares of the applicant at least 12 months prior to the date of the listing application (excluding any subsequent divestments made on or before the date of the listing application); and
• At least two such investors (1) each hold such amount of shares or securities convertible into shares equivalent to 3% or more of the issued share capital of the listing applicant as of the date of its listing application and throughout the preapplication 12-month period; or (2) each have otherwise invested at least HK$450 million in the shares or securities convertible into shares of the applicant at least 12 months prior to the date of the listing application (excluding any subsequent divestments made on or before the date of the listing application).

The table below sets out the independence and sophistication requirements of SIIs:

The table below sets out the expected market capital at time of listing and the respective requirements as to aggregate amount of investment from all SIIs (i.e., not only Pathfinder SIIs) as a percentage of the applicant’s issued share capital at the time of listing:

VALUATION AND SUBSCRIPTION

Due to their lack of a track record of revenue/profit and the newness of their industries, compared to companies with a track record of revenue/profit, it is more difficult to reach a consensus on the valuation of STCs (especially Pre-Commercial Companies) without the benefit of professional experience and industry expertise by independent investors that had the resources to conduct due diligence and thorough research of the STCs’ performance.

Thus, in addition to the listing eligibility requirements mentioned above, Chapter 18C also sets out the initial allocation and subscription mechanism to facilitate the price discovery process for accurate valuation of STCs:

• At least 50% of the total number of shares offered in the IPO should be allocated to Independent Price Setting Investors (being (1) Institutional Professional Investors, or (2) other types of investors with asset under management, fund size, or an investment portfolio size of at least HK$1 billion).
• A minimum free float should be at least HK$600 million upon listing.
• The new prescribed initial retail allocation and clawback mechanism are set out in the table below:

SUBSCRIPTION OF SHARES BY EXISTING SHAREHOLDERS

An existing shareholder holding less than 10% of shares in an STC can participate in the STC’s IPO as either a cornerstone investor or a placee. However, an existing shareholder holding 10% or more of shares in an STC may subscribe for shares in the STC’s IPO only as a cornerstone investor.

POST-IPO LOCK-UP RESTRICTIONS

The HKEx decided that a longer lock-up period should be imposed on the controlling shareholders of STCs and adopted its proposed to impose a lock-up period of 12 months for a Commercial Company and 24 months for a Pre-Commercial Company.

In addition to the existing lock-up requirements on controlling shareholders, shares held by other key persons (namely, founders, weighted voting rights beneficiaries, executive directors and senior management, and key personnel responsible for the technical operations and/or R&D and SIIs) are also subject to lock up for 12 months for a Commercial Company and 24 months for a Pre-Commercial Company.

For the existing investors in an STC (as identified by the HKEx in the relevant guidance(s) as may be amended) or Pathfinder SIIs, the applicable lock-up period is six months for a Commercial Company and 12 months for a Pre-Commercial Company. In cases where there are more than the required number of Pathfinder SIIs, the applicant may decide on a commercial basis which such investors will be subject to the lock-up restrictions.

DISCLOSURE REQUIREMENTS

To enable potential investors to make a fully informed assessment of the applicant’s activities and prospects, both Commercial and Pre-Commercial Companies are required to disclose information, including but not limited, to

• the Specialist Technology Industry and the acceptable sector it falls within;
• information of SIIs (identify, timing of investment, shareholding and/or investment amount);
• Pre-IPO investments, burn rate, and cash operating cost;
• key Specialist Technology Product(s);
• commercialisation status and prospects;
• R&D expenditure and experience;
• business model and industry-specific information; and
• intellectual property.

To address the associated heightened risks and promote valuation transparency, Pre-Commercial Companies face more onerous disclosure requirements, such as detailing:

• R&D stages for each of its Specialist Technology Product(s);
• Key stages and milestones for its products to achieving the commercialisation revenue threshold; and
• All the relevant risks associated with the commercialisation of its products.

CONTINUING DISCLOSURE OBLIGATIONS FOR PRE-COMMERCIAL COMPANIES

To better enable investors to keep track of the company’s business growth, a Pre-Commercial Company, after its successful listing on the HKEx and until it satisfies the Commercialisation Revenue Threshold (HK$250 million for the most recent audited financial year) or one of the Main Board Listing Rule 8.05 financial eligibility tests, shall be subject to additional disclosure obligations required in its interim and annual reports, including:

• details of the development progress of its Specialist Technology Product(s) under development;
• the timeframe for, and any progress made towards, achieving the Commercialisation Revenue Threshold;
• 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 Commercialisation Revenue Threshold.

Additionally, where the HKEx considers that a Pre-Commercial Company has failed to meet its continuing obligation to maintain sufficient operations or assets, it may give the issuer a period of up to 12 months for recompliance before delisting, shorter than the usual 18 months for companies listed through the conventional route.

Pre-Commercial Companies are also restricted from effecting any transaction that will result in a fundamental change to its principal business for as long as it remains a Pre-Commercial Company, unless with prior consent of the HKEx. Again, this restriction is more stringent than that imposed on other listed issuers, who are subject to a similar restriction but for the first 12 months from listing only.

CONCLUSION

The new Chapter 18C regime for STCs grants easier access to public markets for a wide range of innovative high-tech companies and is expected to boost Hong Kong’s appeal as a world-class fundraising hub. The new listing regime is expected to particularly accommodate high-tech unicorns and further diversify the capital market in Hong Kong providing broader opportunities for investors.

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