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New path for technology companies to list in Hong Kong

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    The Hong Kong Stock Exchange has recently released its consultation conclusions on the listing of specialist technology companies. From 31 March 2023 onwards, eligible companies will be able to list under the new Chapter 18C of the Listing Rules (Chapter 18C). It is notable that the original proposals have been relaxed based on market feedback and macroeconomic factors, easing the path for technology companies to list, and represents a welcome development to the listing regime in Hong Kong.

    A company wishing to list under Chapter 18C must demonstrate that it meets the definition of a Specialist Technology Company, and is both eligible and suitable to list either as a Commercial Company or Pre-Commercial Company (defined below).

    What are Specialist Technology Companies? 

    Generally speaking, Specialist Technology Companies are companies that are primarily engaged in the research and development (R&D) and commercialisation of products / services (Specialist Technology Products) that apply science or technology within an acceptable sector of a Specialist Technology Industry (Specialist Technology). Listings of Specialist Technology Companies are governed under Chapter 18C.

    The list of acceptable Specialist Technology Industries, which is not exhaustive, can be found in the Exchange's new guidance letter in Appendix V to the consultation conclusions (Guidance Letter). It covers a wide range of industries, as set out below.

    Acceptable sector
    Examples
    Commentary
    Next generation information technology
    • Cloud-based services
    • Artificial intelligence

    The acceptable sectors originally proposed have largely remained the same in the final conclusions.

    Some additional sub-sectors have been included in the final conclusions e.g. quantum communications, quantum precision measurements, advanced inorganic materials and advanced composite materials.

    The Exchange has commented that the it had not included the following sectors in the final list of acceptable Specialist Technology Industries:

    • big data or financial technology as it often involves "downstream" applications of Specialist Technology, so it was not necessary to include them as separate industries / sectors;
    • companies (including certain fintech companies) that primarily facilitate transactions between service providers / product suppliers and customers for a fee, as their business models are based on their matching services (rather than sales of Specialist Technology Products); and
    • blockchain and digital asset related businesses, as their success often is not attributable to the application of new technology and R&D often do not constitute a major activity.
    Advanced hardware and software
    • Robotics and automation
    • Semiconductors
    • Advanced communication
    • Electric and autonomous vehicles
    • Advanced transportation
    • Aerospace
    • Advanced manufacturing
    • Quantum information technology and computing
    • Metaverse
    Advanced materials
    • Synthetic biological materials
    • Advanced inorganic materials
    • Advanced composite materials
    • Nanomaterials
    New energy and environmental protection
    • Energy generation
    • Energy storage and transmission
    • Green technology (e.g. environmental remediation, emissions reduction)
    New food and agriculture technologies
    • Food: artificial meat, sustainable protein, synthetic biology, food waste reduction
    • Agriculture: agricultural biotechnology, crop efficiency, agricultural synthetic biology, farming

    In the final Guidance Letter, the Exchange clarified in detail, among other matters, how biotech companies and potential applicants that do not fall within this list are treated.

    Biotech companies 

    The Exchange clarified in its Guidance Letter that a biotech company that does not base its listing application on a Regulated Product (as defined in Chapter 18A of the Listing Rules) may apply to list under Chapter 18C if it meets the definition of a Specialist Technology Company. Otherwise, it must apply for listing under Chapter 18A.

    Companies with multiple business segments

    To provide flexibility, the Exchange has not prescribed “bright line” percentage thresholds to determine whether a company is “primarily engaged” in a Specialist Technology business. Instead, the Exchange will make a holistic assessment, based on the non-exhaustive factors set out in paragraph 16 of its Guidance Letter.

    Companies that fall outside the list above

    Under the Guidance Letter, an applicant falling outside of the list of acceptable Specialist Technology Industries may list under Chapter 18C if it is able to demonstrate that:

    (a) it has high growth potential;

    (b) its success is attributable to the application, to its core business, of new technologies and/or the application of the relevant science and/or technology within that sector to a new business model, which differentiates it from traditional market participants serving similar consumers or end users; and

    (c) R&D significantly contributes to its expected value and constitutes a major activity and expense

    (collectively, the Principles).

    Such companies must apply for a pre-IPO enquiry to the Exchange. The Exchange, in consultation with the SFC, will take into account all relevant factors when assessing whether such company may list under Chapter 18C. The Exchange may update the above list of acceptable Specialist Technology Industries from time to time.

    Exchange's discretion to reject an application

    Even if an applicant falls within the list of acceptable Specialist Technology Industries, under the Guidance Letter, the Exchange retains the discretion to reject a listing application if the applicant displays attributes that are inconsistent with the Principles.

    Commercial vs Pre-Commercial Companies

    Specialist Technology Companies are divided into two types.

    Commercial Companies
    Pre-Commercial Companies

    At the time of listing, they have revenue of at least HK$250 million for its most recent audited financial year (Commericalisation Revenue Threshold).

    This means that these companies have achieved meaningful commercialisation of their Specialist Technology Products.

    At the time of listing, these companies have not reached the Commericalisation Revenue Threshold for its most recent audited financial year.

    These companies are primarily engaged in R&D to bring their Specialist Technology Products to commercialisation.

    Retail investors are permitted to invest in both types of companies.

    Proposed qualifications for listing 


    Commercial Companies
    Pre-Commercial Companies
    Initial market capitalisation at the time of listing
    At least HK$6 billion at the time of listing.
    At least HK$10 billion at the time of listing.
    Commentary: The final figures have been substantially reduced based on market feedback and macroeconomic factors (down from HK$8 billion for Commercial Companies and HK$15 billion for Pre-Commercial Companies).
    Minimum revenue for the most recent audited financial year

    At least HK$250 million arising from the company’s Specialist Technology business segment(s) (i.e. the Commericalisation Revenue Threshold).

    Normally expected to demonstrate year-on-year revenue growth throughout the track record period, with allowance for temporary declines in revenue (for example, due to economic, market or industry-wide conditions or other temporary factors outside of the applicant’s control).

    No requirement.
    R&D expenditureEngaged in R&D for at least three financial years prior to listing.
    R&D investment constitutes at least 15% of total operating expenditure.

    Companies with revenue of at least HK$150 million but less than $250 million for the most recent audited financial year:

    R&D investment constitutes at least 30% of its total operating expenditure.

    Companies with revenue below HK$150 million for the most recent audited financial year:

    R&D investment constitutes at least 50% of its total operating expenditure.

    Commentary: The R&D expenditure ratio was adjusted in the final rules depending on revenue level.

    The applicable percentage threshold above must be met:

    (a) on a yearly basis for at least two of the three financial years prior to its listing; and

    (b) on an aggregate basis over all three financial years prior to listing.

    If the Exchange accepts a shorter trading record period in exceptional circumstances (see "Operational track record" below), the applicant must meet the R&D expenditure ratio on a yearly basis for each of the most recent two financial years prior to its listing.

    Commentary: The original proposed rules were relaxed to cater for fluctuations in the overall expenditure and the ratio attributable to R&D. Details of how the R&D expenditure ratio is calculated can be found in Part C of the Guidance Letter.

    Operational track record

    At least three financial years of operation under substantially the same management prior to listing.

    The Exchange may accept a shorter trading record of at least two financial years, on a case-by-case basis in exceptional circumstances, by applying the same approach as set out in Listing Rule 8.05B(3).

    Ownership continuityOwnership continuity and control in the 12 months prior to the date of the listing application, and up until the time immediately before the offering and/or placing becomes unconditional.
    Third party investment

    The listing applicant must have received meaningful investment from Sophisticated Independent Investors. Details about this requirement can be found in Part D of the Guidance Letter.

    There is no general exemption from this requirement. However, exemptions may apply, on a case by case basis, in the context of spin-offs or applicants listed on other stock exchanges that apply to list under Chapter 18C.

    Who is an "independent" sophisticated investor?

    Independence is determined as at the signing date of the definitive agreement for the relevant investment in an applicant, and up to listing.

    The following investors are not considered "independent":

    (a) a core connected person of the listing applicant (i.e. a director, supervisor, chief executive or substantial shareholder of the company or any of its subsidiaries or a close associate of any of them); however, a substantial shareholder of the applicant may be considered a Sophisticated Independent Investor if it is a core connected person only because of the size of its shareholding in the applicant;

    (b) controlling shareholders of the listing applicant;

    (c) the founder(s) of the applicant and their respective close associates; and

    (d) persons that the Exchange deems to be not independent (e.g. a person who has an acting-in-concert agreement or arrangement with the founders or controlling shareholders).

    Commentary: The Exchange clarified the timing for determining independence and expanded the categories of persons that are not considered independent in the final rules. 

    Who is a "sophisticated" investor?

    The Exchange will assess each investor on a case-by-case basis, taking into account factors such as its relevant investment experience, knowledge and expertise in the relevant field which could be demonstrated by its net assets, assets under management (AUM), size of its investment portfolio or track record of investments.

    For illustration, the Exchange would generally consider the following as "sophisticated" investors:

    (a) an asset management firm with AUM of, or a fund with a fund size of, at least HK$15 billion;

    (b) a company having a diverse investment portfolio size of at least HK$15 billion;

    (c) an investor with an AUM, fund size or investment portfolio size of at least HK$5 billion where that value is derived primarily from Specialist Technology investments; and

    (d) a key participant in the relevant upstream or downstream industry with meaningful market share and size, as supported by appropriate independent market or operational data.

    The Exchange emphasized in its conclusions that other types of "sophisticated" investors will be considered on a case by case basis.

    Reasons for why an investor is considered "sophisticated" must be substantiated and disclosed in the listing document. If certain information cannot be disclosed due to confidentiality reasons, the Exchange may consider alternative disclosures based on its existing guidelines.

    What is considered a meaningful investment?

    As an indicative benchmark, meaningful investment involves two components: investment from (a) Pathfinder SIIs (defined below) and (b) all sophisticated independent investors.

    Investment from Pathfinder SIIs

    Investments from at least 2 to 5 sophisticated independent investors (each having invested in the applicant at least 12 months before the date of the listing application) (“Pathfinder SIIs”) that fulfil the following:

    (a) such Pathfinder SIIs, in aggregate:

    (i) hold shares or securities convertible into shares equivalent to 10% or more of the issued share capital of the applicant as at the date of its listing application and throughout the pre-application 12-month period; or

    (ii) have otherwise invested an aggregate sum of at least HK$1.5 billion in the shares or securities convertible into shares of the applicant at least 12 months prior to the date of the listing application (excluding any subsequent divestments made on or before the date of the listing application); and

    (b) at least 2 Pathfinder SIIs:

    (i) each holding shares or securities convertible into shares equivalent to 3% or more of the issued share capital of the applicant as at the date of its listing application and throughout the pre-application 12-month period; or

    (ii) each having invested at least HK$450 million in the shares or securities convertible into shares of the applicant at least 12 months prior to the date of the listing application (excluding any subsequent divestments made on or before the date of the listing application).

    The timing of investment by the Pathfinder SIIs should be determined by reference to the date of irrevocable settlement.

    The Guidance Letter also sets out non-exhaustive examples of temporary fluctuations in the shareholding of the Pathfinder SIIs (i.e. the 10% / 3% requirement) that the Exchange is prepared to accept.

    Commentary: Although the requirement for Pathfinder SIIs remains, the Exchange has relaxed the indicative benchmarks to a large degree in the final rules to provide more flexibility for applicants.

    Investment from all sophisticated independent investors

    Investments from all sophisticated independent investors result in them holding, in aggregate, shares or securities convertible into shares equivalent to the following percentages (before exercise of any overallotment option) as set out below (Aggregate Investment Benchmark):

    Commercial Companies
    Expected market capitalisation at the time of listing (HK$)
    Minimum total investment (as % of issued share capital) at time of listing
    ≥ 6 million to < 15 billion
    20%
    ≥ 15 billion to <30 billion
    15%
     ≥ 30 billion 10%

     

    Pre-Commercial Companies
    Expected market capitalisation at the time of listing (HK$)
    Minimum total investment (as % of issued share capital) at time of listing
    ≥ 10 million to < 15 billion
    25%
    ≥ 15 billion to <30 billion
    20%
    ≥ 30 billion15%

    The Aggregate Investment Benchmark includes investments by sophisticated independent investors made before listing, and any shares issued to such investors at the time of listing (whether or not those investors held securities in the relevant applicant before listing).

    In addition, if investments made by sophisticated independent investors before listing and cornerstone investments by sophisticated independent investors are insufficient to meet the Aggregate Investment Benchmark, the Exchange would allow shares allocated to sophisticated independent investors participating as placees under the placing tranche to satisfy the Aggregate Investment Benchmark (SII Placees), provided that certain conditions are met.

    Commentary: The expected market capitalisation tiers in the final rules have been adjusted to reflect the revised minimum market capitalisation. In addition, the Exchange has clarified in the final rules the types of investments that may count towards the Aggregate Investment Benchmark.

    Securities convertible into shares

    In the case of securities convertible into shares in an applicant, only investments which would be converted at, or before, listing will be counted towards the "meaningful investment" requirement.

    Proposed qualifications for listing: additional requirements for Pre-Commercial Companies  

    Its primary reason for listing is to raise funds for R&D, manufacturing and/or sales of its Specialist Technology Products to bring them to commercialisation. It needs to demonstrate, and disclose in the listing document, a credible path (including the timeframe and any impediments) to achieving the Commericalisation Revenue Threshold.

    Non-exhaustive examples of a credible path to achieving the Commericalisation Revenue Threshold are set out in Part E of the Guidance Letter. Despite the examples given, the Guidance Letter emphasizes there may be other alternative ways in demonstrating a credible path to commercialisation, and that the Exchange will take a holistic approach in assessing the information provided.

    In addition, the applicant must have available working capital (including the expected IPO proceeds) to cover at least 125% of the group’s costs (which must substantially consist of general, administrative and operating costs and R&D costs) for at least 12 months from the date of its listing document.

    IPO requirements


    Commercial Companies
    Pre-Commercial Companies
    Price discovery process

    The listing applicant must allocate at least 50% of the total number of shares offered in the IPO (excluding any shares to be issued pursuant to the exercise of any over-allotment option) to Independent Price Setting Investors. This is defined in Part F of the Guidance Letter to include:

    (a) Institutional Professional Investors1; and

    (b) other types of investors with AUM, fund size or investment portfolio size of at least HK$1 billion.

    Such an investor will not be considered "independent" if it is:

    (a) an existing shareholder of the applicant, or a close associate of such an existing shareholder; or

    (b) a core connected person of the applicant.

    Commentary: Independent Price Setting Investors have been expanded to include more types of investors in the final rules.

    The following initial allocation and clawback mechanism applies:


    Initial
    No. of times (x) of over-subscription in the public subscription tranche
    10x to less than 50x
    50x or more
    Minimum retail allocation as a percentage of total offer shares
    5%
    10%
    20%

    Commentary: No changes have been made to the above figures in the final rules.

    Free float

    The minimum free float (being shares not subject to any disposal restrictions whether under contract, the Listing Rules, applicable laws or otherwise) must be at least HK$600 million upon listing.

    Commentary: Despite the reduction in the minimum market capitalisation requirement, the minimum "free float" amount has not been changed.

    Offer size

    The offer (including both the placing tranche and the public subscription tranche) must be of a meaningful size. The Exchange may not approve a Chapter 18C listing if the offer size is not significant enough to facilitate price discovery, or may otherwise give rise to orderly market concerns.

    However, the Exchange emphasized in its consultation conclusions that it does not wish to set a bright-line threshold as to what is considered a "meaningful size". The Exchange intends to assess whether an offer size is meaningful on a case-by-case basis.

    Disclosure
    • Additional disclosures are required, such as relating to (a) pre-IPO investments and cash flows; (b) products and commercialisation status and prospects; (c) R&D; (d) third party investors; (e) industry specific information; and (f) intellectual property.
    • The applicant must include a warning statement in the listing document that it is a Specialist Technology Company and so investment in its securities carries additional risks.
     
    • The applicant must disclose in its listing document the key stages and milestones for its products to reach the Commercialisation Revenue Threshold, risks to commercialisation, and potential early expiry of any lock-up periods.
    • It must include a warning statement that that the company may not generate sufficient revenue to sustain its operations after listing and that it may fail due to a lack of available funds.

    Post IPO lock up requirements

    Person
    Securities subject to disposal restriction
    Post-IPO Lock-up Period
    Commercial CompaniesPre-Commercial Companies

    Controlling shareholders

    Key persons (including their respective close associates) covering:

    • Founders
    • Beneficiaries of weighted voting rights
    • Executive directors and senior management
    • Key personnel responsible for technical operations and/ or R&D of the relevant products
    Securities beneficially owned as disclosed in listing document (excluding those sold under any offer for sale contained in the listing document)
    12 months from the listing date
    24 months from the listing date
     Securities subscribed for in the IPOIt the shareholder subscribes as a cornerstone investor, the applicable lock-up period for cornerstone investment would apply.
    Pathfinder SIIs
    Securities beneficially owned as disclosed in listing document (excluding those sold under any offer for sale contained in the listing document)
    6 months from listing date
    12 months from the listing date
    Securities subscribed for in the IPO
    If the shareholder subscribes as a cornerstone investor, the applicable lock-up period for cornerstone investment would apply.

    If a Pre-Commercial Company achieves the Commercialisation Revenue Threshold, the lockup periods would be reduced to end on the later of:

    (a) the date on which such lock-up periods would have ended if the issuer had applied for listing as a Commercial Company; and

    (b) the date falling on the 30th day after the announcement on the removal of designation as a Pre-Commercial Company. 

    A Pre-Commercial Company is required to disclose such potential reduction of the lock-up period in its listing document. The revised lock-up period should also be disclosed in the announcement on the removal of designation as a Pre-Commercial Company.

    Commentary: No changes have been made to the length of the lock-up requirements, however, note the potential reduction in the lock-up period if a Pre-Commercial Company achieves the Commercialisation Revenue Threshold (which was introduced in the final rules).

    Continuing obligations for Pre-Commercial Companies (until it meets the Commericalisation Revenue Threshold)

    Additional continuing obligations include the following matters:

    • additional disclosure requirements in the issuer's interim and annual reports;
    • shortened remedial period of 12 months (rather than the usual 18 months) for re-compliance with the sufficiency of operations requirement before delisting;
    • restriction from effecting any transaction that would constitute a material change of business without the prior consent of the Exchange; and
    • be prominently identified by the stock marker "P" at the end of their stock names.

    A Pre-Commercial Company that wishes to cease being regarded as a Pre-Commercial Company after listing must make an application to the Exchange.

    Conclusion 

    The initial proposed requirements in Chapter 18C set a very high bar, which ruled out listings by non-unicorn Specialist Technology Companies. The market may be pleased to know that the final Chapter 18C rules are less restrictive than originally proposed. Time will tell whether the final Chapter 18C will be a success story for Hong Kong as a listing venue. 

    For further information, please reach out to your usual contact at Ashurst or the partners mentioned below.

    1. Persons falling under paragraph (a) to (i) of the definition of "professional investor" in Section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO).  For the avoidance of doubt, Institutional Professional Investors do not include "corporate professional investors" and "individual professional investors" (both as defined under the SFO).

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