The Hong Kong Stock Exchange (HKEx) has concluded its consultation on GEM listing reforms. All reform proposals were approved with minor modifications and will go into effect 1 January 2024.
Key features of the GEM listing conclusions provided by the HKEx are summarised below.
New Alternative Eligibility Test for R&D Intensive Companies
HKEx has adopted 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.
HKEx has clarified that the new alternative eligibility test is open to companies from all types of industries. Any company with substantial R&D investment in its own discipline will be able to apply for a GEM listing using the above test.
Key points are summarized below for this alternative “market capitalization/revenue/R&D test.”
REDUCTION OF POST-IPO LOCK-UP PERIOD FOR CONTROLLING SHAREHOLDERS
The post-IPO 24-month lock-up period imposed on controlling shareholders of GEM issuers will be shortened to 12 months.
This reduction will result in GEM being consistent with Main Board requirements, where the controlling shareholders of an issuer are not able to dispose of any of their interests in the issuer within the first six months of listing and are not able to dispose of any interest in the second six months that would result in their no longer being a controlling shareholder. With shell activities having largely ceased, the HKEx stated that the previously extended lock-up period is no longer necessary and that its reduction may help enhance liquidity.
CONTINUING OBLIGATIONS
Compliance Officer and Compliance Adviser
The HKEX has highlighted the importance of aligning the ongoing obligations of a GEM issuer’s compliance officer and compliance adviser with those of the Main Board as most GEM applicants are relatively well established at the time of their listing in addition to the fact that the ongoing obligations of Main Board issuers and GEM issuers are almost identical.
Periodic Reporting Requirements for GEM Issuers
HKEx will adopt the proposals to remove quarterly financial reporting as a compulsory requirement for GEM issuers. It will also align with current requirements for Main Board issuers by extending the deadline for GEM issuers to publish their (a) annual reports, (b) interim reports, and (c) preliminary announcements of results for the first half of each financial year.
NEW STREAMLINED TRANSFER MECHANISM TO THE MAIN BOARD
HKEx has confirmed that GEM issuers will be able to choose the existing transfer route for a quicker transfer, provided that the benefit of doing so outweighs the cost of sponsor due diligence and the production of a “prospectus-standard” listing document.
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
Proposed Streamlined Transfer Mechanism
Daily Turnover Test
Volume Weighted Average Market Capitalization Test
In addition, the HKEx decided to exempt a transfer applicant from the Main Board’s initial listing fee. Such exemption could lower the cost of transfer to the Main Board and help incentivize use of the streamlined transfer mechanism.
MOVING FORWARD
Existing GEM issuers should take note of the following:
- Quarterly reports: A GEM issuer will not be required to publish a quarterly report or preliminary announcement of quarterly results if the due date for the publication of such a report/results announcement under the current GEM Listing Rules falls on a date on or after 1 January 2024.
- Reporting timeframes: The extended publication deadlines under the amended GEM Listing Rules will apply in respect of any financial report/results announcement for a financial year or half-year if the due date for the publication of such a report or results announcement, under the current GEM Listing Rules, falls on a date on or after 1 January 2024.
- Streamlined transfer mechanism: Any GEM issuer that wishes to use the streamlined transfer mechanism under the new Chapter 9B of the Main Board Listing Rules to transfer its listing to the Main Board will be required to submit a new transfer application on or after 1 January 2024.
CONCLUSION
Given the decline in the number of new listings and funds raised on GEM since 2019, the reforms are overall a positive step towards revitalizing GEM. The new listing requirements will help reduce compliance costs for current GEM issuers whilst upholding market quality and ensuring investor protection.
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