October 9, 2023

Consultation paper on HKEx’s GEM Listing Reforms

David Chan, Stephen Chan, Jacqueline Foo, Charles Lam

Dechert LLP

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Dechert LLP

Background

On 26 September 2023, The Stock Exchange of Hong Kong Limited (the “HKEx”) published the consultation paper on the proposals for GEM listing reforms in Hong Kong.

GEM (formerly known as the “Growth Enterprise Market”) was launched in November 1999 to provide emerging growth companies with a separate and alternative capital formation platform to the Main Board. In February 2018, the HKEx removed the streamlined process, which was introduced in July 2008, whereby GEM issuers could transfer to the Main Board if they meet the Main Board admission requirements without the need to appoint a sponsor and to issue listing document as part of the market quality reform measures introduced at the time.

Since 2019, the number of new listings (2019 IPOs: 15; 2020 IPOs: 8; 2021 IPOs: 1; 2022 IPOs: 0) and funds raised (2019: HK$4.3 billion; 2020: HK$3.6 billion; 2021: HK$3.3 billion; 2022: HK$2.7 billion) on GEM have significantly declined. In 2022 no new issuers listed on GEM and existing listed issuers raised only HK$2.7 billion in funds.

HKEx believes the recent decline in GEM listing activity is mainly attributable to (i) the COVID-19 pandemic; and (ii) alternative choice of SME listing venues. SMEs have long been considered the backbone of the Hong Kong economy, driving innovation, employment, and economic growth. Encouraging and facilitating SME listings will continue to be a key priority for HKEx.

It was stated in HKEx’s 2021 Consultation Conclusions that it would launch a GEM review to consider GEM’s positioning, market perception, and viability as an alternative to the Main Board. HKEx has engaged with a broad range of stakeholders to hear their concerns regarding GEM, and has developed proposals to reform the Listing Rules in order to address the key issues identified. In conducting the review of GEM, HKEx aims to strike a balance between facilitating capital raising opportunities for issuers and protecting the interests of GEM investors, many of whom are individuals.

Key proposals

HKEx’s three main proposals include (i) the introduction of a new alternative eligibility test, (ii) removal of mandatory quarterly reporting requirement, and (iii) introduction of a new streamlined Main Board transfer mechanism. Further details on such proposals are summarized below.

	Existing requirements	Proposed requirements
New alternative financial eligibility test for high growth enterprises
Financial eligibility test	Existing cash flow test[1]: Two years track record period; Positive operating cash flow ≥ HK$30 million; and Market capitalisation ≥ HK$150 million	New alternative market capitalization / revenue / R&D test: Two years track record period; Market capitalisation ≥ HK$250 million; Revenue ≥ HK$100 million (with year-on-year growth); and Applicants that incurred R&D expenditure of at least HK$30 million, and must be take at least 15% of its total operating expenditure
Streamlined transfer listing mechanism[2]
Track Record Period	One full financial year after GEM listing	Three full financial years after GEM listing Applicants would still need to fulfill requirements regarding (i) ownership continuity and (ii) no fundamental change in principal business throughout that period
Qualifications for transfer	The transfer applicant must: in the 12 months preceding the transfer application and until the commencement of dealings in its securities on the Main Board, not have been the subject of any disciplinary investigation by the Exchange in relation to a serious breach or potentially serious breach of any Listing Rules	The transfer applicant must: have reached the Minimum Daily Turnover Threshold[3] on at least 50% of the trading days over the Reference Period[4] have a volume weighted average market capitalisation that meets the minimum market capitalisation requirement for Main Board listing (i) have not committed serious breach of Listing Rules in the past 12 months and until its Main Board listing; and (ii) not under HKEx investigation or ongoing disciplinary proceedings
Sponsor appointment/ due diligence	Sponsor(s) must be appointed at least two months before transfer application	No longer required to appoint sponsor(s) to conduct due diligence for its transfer
Publication of a listing document	Applicant required to issue “prospectus-standard” listing document and ensure full disclosure is made and appropriate due diligence is performed	No longer required to issue “prospectus-standard” listing document, only required to submit certain application documents as required by HKEx, e.g. formal application for listing, advanced draft public announcement of the transfer, and working capital sufficiency statement.
Initial listing fee for GEM transferees	GEM transferees required to pay initial listing fee	Proposed fee exemption
Continuing obligations for GEM issuers
Quarterly reporting requirement	Mandatory quarterly reporting requirement not later than 45 days after the end of the period	Removal of mandatory quarterly reporting requirement
Compliance officer requirement	GEM Rule 5.19 requires one of its executive directors assumes responsibility as compliance officer	No longer require one of its executive directors assumes responsibility as compliance officer
Compliance adviser requirement	GEM Rule 6A.19 requires issuer to retain a compliance adviser for at least until the publication of its second financial year results

Conclusion

The HKEx published a Consultation Paper on GEM Listing Reforms on 26 September 2023 which would provide a six week consultation period to allow applicants, stakeholders and the public to provide feedback on the proposed reform. The reform is expected to be effective in early 2024.

HKEx has acknowledged in its Consultation Paper that its proposals may not address all of the concerns of every stakeholder. In particular, the proposals will not significantly reduce the cost of an application to list on GEM, but should result in a reduction in the cost of maintaining a GEM listing and the cost of transfer to the Main Board. HKEx has reiterated that it is committed to providing a supportive environment where SMEs can thrive, ultimately contributing to the continued prosperity of both Hong Kong and the global economy, and aims to provide companies with a platform to offer their securities to investors and then provides the means for investors to trade those securities. With the GEM listing reform, it is hoped that HKEx is able to address stakeholder concerns and achieve a balance which is essential to GEM’s long-term success.

Footnotes

This will remain as one of the accepted financial eligibility tests for GEM listing.
GEM issuers that do not meet the proposed streamlined transfer requirements would still be able to apply for a transfer under existing requirements. Accordingly, such a transferee would be required to appoint a sponsor to conduct due diligence and publish a “prospectus-standard” listing document for its transfer.
Either HK$100,000 or HK$50,000, depending on circumstances.
250 trading days immediately preceding the transfer application and until the commencement of dealings in its securities on the Main Board.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.