October 2, 2023

HKEx Announces Consultation on GEM Listing Reforms

Morgan Lewis

+ Follow Contact

Send

Embed

Morgan Lewis

The Hong Kong Stock Exchange (HKEx) published a consultation paper announcing the launch of a six-week consultation on GEM listing reforms, undertaking new initiatives to bolster its support for small and medium-sized enterprises (SMEs).

The consultation of reforms was introduced amid significant decline in the number of new listings and funds raised on the GEM since 2019. The proposals include a new alternative eligibility test for companies in the high-growth segment, the removal of some undue and rigid continuing obligations, and a new streamlined mechanism for eligible GEM companies to transfer to the HKEx Main Board.

Key features of the GEM listing reforms proposed by the HKEx are discussed below.

NEW ALTERNATIVE ELIGIBILITY TEST FOR R&D INTENSIVE COMPANIES

HKEx proposes introducing a new alternative eligibility test for initial listing on the GEM board, targeting high-growth enterprises that are heavily engaged in research and development (R&D) activities but do not have a sufficient track record of positive operating cash flow for the current listing requirements. Key proposed changes are summarized below for this alternative “market capitalization/ revenue/R&D test.”

Requirements		Existing Test	Proposed Alternative Test
Track record	Trading record	2 full financial years
	Ownership continuity	1 full financial year
	Management continuity	2 full financial years
Expected market capitalization at listing		≥HK$150m	≥HK$250m
Cashflow (2-year aggregate)		≥HK$30m	/
Revenue	2-year aggregate	/	≥HK$100m
	Year-on-year growth	/	Required
R&D expenditure	2-year aggregate	/	≥HK$30m
	% of total operating expenditure	/	≥15% each year

CONTINUING OBLIGATIONS

Compliance Officer and Compliance Adviser

At its 1999 launch, the GEM’s initial “buyer beware” regulatory philosophy mandated unique compliance officer and compliance adviser requirements, expecting early-stage developing issuers. However, HKEx sees these requirements as increasingly irrelevant because (1) GEM listing applicants today are usually well established with a long history of operations at the time of application and (2) previous reforms over the years have converged GEM and Main Board Listing Rules requirements.

	Existing Requirements	Proposed Requirements
Compliance officer appointment	One of the executive directors	Requirement removed
Period of compliance adviser engagement	Ends on issuer publishing its second full financial year’s results	Ends on issuer publishing its first full financial year’s results

Periodic Reporting Requirements for GEM Issuers

HKEx proposes removing the existing mandatory quarterly reporting requirements and aligning other ongoing obligations with those of the Main Board. This proposal aims at reducing the compliance costs of a GEM listing.

	Existing Publishing Deadline	Proposed Publishing Deadline
Annual reports	Three months after the financial period ends	Four months after the financial year ends
Half-year reports	45 days after the financial period ends	Three months after the first six months of the financial year end
Quarterly reports	45 days after the financial period ends	Recommended only as best practice in the GEM’s Corporate Governance Code
Preliminary results announcement of first six months of a financial year	45 days after the first six months of the financial year end	Two months after the first six months of the financial year end

NEW STREAMLINED TRANSFER MECHANISM TO THE MAIN BOARD

The lack of a streamlined transfer mechanism to the Main Board has encouraged many SMEs to stay private and plan for a direct Main Board listing rather than a GEM listing. With recent market quality reforms successfully suppressing shell activities, HKEx now seeks to boost the GEM’s attractiveness by reinstating a new streamlined transfer mechanism.

The following is an overview of the proposed requirements for GEM issuers under the streamlined approach:

Main Board qualifications
Track record
Application documents submission
Compliance record
Daily Turnover Test
Volume Weighted Average Market Capitalization Test

A GEM issuer can still apply for a transfer under existing requirements if it does not meet the proposed streamlined transfer requirements. Each requirement in the overview of the streamlined approach is analyzed in detail below.

Proposed Streamlined Transfer Mechanism

	Existing Requirements	Proposed Requirements
Main Board qualifications	A transfer applicant must meet all the qualifications for listing on the Main Board.
Sponsor appointment/due diligence	A transfer applicant must appoint a sponsor at least two months before submitting a transfer application.	A transfer applicant will not be required to appoint a sponsor to conduct due diligence for its transfer.
Track record	A transfer applicant must have published its financial results for the first full financial year commencing after the date of its initial listing on the GEM.	A transfer applicant must have published its financial results for the three full financial years as a GEM-listed issuer before its transfer, with (1) ownership continuity and control, and (2) no fundamental change in its principal business, throughout that period.
Listing document/application documents submission	A transfer must issue a “prospectus-standard” listing document	A transfer applicant will not be required to issue a “prospectus-standard” listing document. A transfer applicant must instead submit the following application documents to the Listing Division: Formal listing application Short announcement of the application Long-form announcement of the transfer Working capital sufficiency statement
Compliance record	A transfer applicant must not have been the subject of any disciplinary investigation by HKEx in relation to serious breach or potentially serious breach of any Listing Rules in the 12 months before the transfer application and until the commencement of dealings in its securities on the Main Board.	A transfer applicant must not have been held to have committed a serious breach of any Listing Rules in the 12 months preceding the transfer application; and not be the subject of any investigation by HKEx, or any ongoing disciplinary proceedings under Chapter 3 of the GEM Listing Rules in relation to a serious breach or potentially serious breach of any Listing Rules as at the date of the transfer application and the date when dealing in its securities commences on the Main Board.

Daily Turnover Test

Definition	Daily Turnover: Total value of an applicant’s GEM shares traded on a trading day
	Minimum Turnover Threshold: Either HK$100,000 or HK$50,000, depending on the result of the public consultation
	Reference Period: The 250 trading days immediately before the transfer application and until the commencement of dealings on the Main Board
The Test	A transfer applicant must have reached the Minimum Turnover Threshold on at least 50% of the trading days over the Reference Period.

Volume Weighted Average Market Capitalization Test

Definition	Daily Market Capitalization on any trading day – Number of total issued shares x (Daily Turnover/Number of shares traded)
	Volume Weighted Average Market Capitalization – The weighted average of Daily Market Capitalization based on trading volume over the Reference Period
	Reference Period – The 250 trading days immediately before the transfer application and until the commencement of dealings on the Main Board
The Test	A transfer applicant’s Volume Weighted Average Market Capitalization over the Reference Period must meet the minimum market capitalization requirement for listing on the Main Board based on the applicable threshold.

CONCLUSION

The proposed listing reforms demonstrate HKEx’s determination to revitalize the GEM as an important platform for high-growth SMEs and investors in the wake of the impact of COVID-19 pandemic and alternative venues of SME listing. While the proposal is a positive step forward, HKEx is mindful of the need to balance its commitment in protecting the interests of investors. The public comment period for the consultation ends on November 6, 2023.

Send Print Report

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.