GEM listing reform proposed by the Hong Kong Stock Exchange
In September 2023, the Stock Exchange of Hong Kong (SEHK) published a consultation paper on GEM listing reforms (Consultation Paper) expressing its commitment to small and medium-sized enterprises in providing a supportive environment where they can thrive, ultimately contributing to the continued prosperity of both Hong Kong and the global economy.
Established in 1999, GEM is a platform designed for small and mid-cap companies to access capital markets and raise funds for growth. Since 2019, the number of new listings and funds raised on GEM have significantly declined. In 2022, no new issuers listed on GEM.
In response to feedback from a broad range of stakeholders on i) high minimum eligibility thresholds for listing; ii) high cost of listing of GEM compared to the amount of funds that they could raise by listing; (iii) lack of streamlined transfer mechanism to the Main Board; and iv) the need to ensure protection for investors, the SEHK has made the following key proposals in the Consultation Paper:
- New alternative eligibility test – A new financial eligibility test targeting high growth enterprises that are heavily engaged in R&D activities. GEM listing applicants using this new test must have the following:
- an adequate trading record of at least two financial years;
- an expected market capitalisation of at least HK$250 million at the time of listing;
- revenue of at least HK$100 million in aggregate for the two most recent audited financial years, with year-on-year growth over the two financial years; and
- incurred R&D expenditure of at least HK$30 million in aggregate for the two financial years prior to listing, where the R&D expenditure incurred for each financial year must be at least 15 per cent of its total operating expenditure for the same period.
- Removal of mandatory quarterly reporting requirement – Given that GEM listing applicants are usually well established with a long history of operations at the time of their application, and both GEM and Main Board Listing Rule requirements have converged following previous reforms over the years, there may be less of a need to require GEM to report more frequently than Main Board issuers.
- New streamlined transfer mechanism – Relaxation of its rules relating to sponsor appointment/due diligence and publication of a listing document. A transfer applicant will no longer be required to appoint a sponsor to conduct due diligence for its transfer or issue a “prospectus-standard” listing document. A transfer applicant will only be required to submit certain application documents as required by the SEHK and publish an announcement as soon as practicable before the intended date dealings on the Main Board.
Other proposals relate to (i) the reduction of the post-IPO lock up period for controlling shareholders; (ii) the removal of the requirement for the appointment of a compliance officer; and (iii) the reduction of the period for the appointment of a compliance adviser.
Profile of GEM listed issuers
Most GEM listed issuers belong to one of four industries: Consumer Discretionary, Information Technology, Properties & Construction, and Industrial. Most of the GEM listed issuers derive the majority of their revenue from Hong Kong (46 per cent), followed by Mainland China (33 per cent) and other regions (21 per cent).
Over 80 per cent of the GEM listed issuers are incorporated in the Cayman Islands mainly due to its attractiveness, including, amongst others, trusted and reliable legal systems, corporate law flexibility, and tax neutrality. Around 9 per cent of GEM listed issuers are incorporated in Bermuda, which is becoming less common in recent IPO listings in Hong Kong.
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The Corporate team at Harneys advises on complex cross-border transactions involving the British Virgin Islands, Cayman Islands, Bermuda, Luxembourg, and Cyprus corporate vehicles. The team’s significant track record includes advising on high-profile private equity transactions, landmark IPOs, public and private M&A, and joint ventures. The firm’s expertise lies in advising entities listed or listing on all major stock exchanges, including the New York Stock Exchange, NASDAQ, the London Stock Exchange, AIM, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Luxembourg Stock Exchange.