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.”
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.
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.
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
Daily Turnover Test
Volume Weighted Average Market Capitalization Test
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.