Concerns rise on proposed GEM reforms in wake of SPAC’s footsteps

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GEM reforms on SPAC
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Following stagnation on the Growth Enterprise Market (GEM), the HKEX is seeking to revitalise its second board but there are concerns the revamp will crimp rather than promote activity as has occurred after the SPAC reforms.

The HKEX’s GEM listing reforms are aimed at boosting fundraising for small and medium-sized enterprises and technology startups. The move came after a period of stagnation, with around half of the GEM’s listed companies reporting zero turnover and no new listings for more than two years.

In a consultation paper released on 26 September, the HKEX has proposed several measures to breathe new life into the GEM. These measures included a streamlined transfer mechanism for eligible GEM companies to transition to the main board, an alternative eligibility test for high-growth segment companies and the removal of quarterly reporting requirements. The consultation will last six weeks, and the new reforms are expected to be implemented in early 2024.

Bosco Leung
Bosco Leung

Bosco Leung, a partner at LLinks Law Offices in Hong Kong, highlighted the difficulties encountered by GEM-listed companies looking to transition to the main board. He recently acted as Hong Kong counsel for the solo sponsor Goldlink Capital (Corporate Finance) in Best Linking Group Holdings’ transfer listing from the GEM to the main board in September.

Leung said Hong Kong regulators had previously tightened the simplified transfer channels to prevent backdoor listings on the GEM. Alongside the challenging transition to the main board, compliance costs on the GEM were comparable to those of the main board. This situation has hindered the growth and market performance of GEM-listed companies, potentially leading to a decline in their share prices.

One significant aspect of the reform proposal is the introduction of a streamlined transfer mechanism that allows eligible small and medium-sized issuers to move to the main board with less stringent requirements and lower compliance costs. This transfer can be done without appointing a sponsor or publishing a prospectus.

Among the streamlined transfer requirements, one mandates that the volume-weighted average market capitalisation of a switchboard applicant must satisfy the minimum market capitalisation of HKD500 million for a main board listing.

Leung provided insights, saying that “the GEM-listed companies possess an average market capitalisation below HKD200 million (USD25.57 million). Meeting the criteria for switching to the main board is thus challenging for these companies.”

“In addition to streamlining the transfer process, further measures may be necessary to stimulate trading on the GEM,” added Leung.

He also expressed concerns about the consultation paper’s requirement for new tech-focused companies seeking GEM listing to have revenues of “not less than HKD100 million in two financial years”, which he deemed as unattractive.

Hong Kong IPOs declined in the first three quarters of this year, with only 44 listings raising a total of HKD24.6 billion, marking a 65% and 15% year-on-year slump, respectively. This prompted the HKEX’s renewed focus on the GEM board.

However, before the revision of the GEM the HKEX has been actively implementing reforms since 2018 to boost capital market activity. These initiatives include the introduction of chapter 18A, which allows the listing of unprofitable biotechnology companies, chapter 18B for the special purpose acquisition company (SPAC) regime and chapter 18C, aimed at attracting specialist technology industries.

Among these three primary mechanisms, chapter 18A has shown positive results, while chapter 18C, launched six months ago, is still undergoing evaluation due to its relatively recent implementation. But notably, within a span of just three months since the chapter 18c announcement, a company had already submitted its applications to the HKEX.

In contrast, Hong Kong’s SPAC regime has witnessed limited activity. It took nearly two years for the first proposed de-SPAC project to emerge since its implementation in January 2022.

Hong Kong’s first SPAC, Aquila, announced its merger agreement with China Merchants Steel Group on 31 August. The successful completion of this merger, subject to approval from two-thirds of the shareholders at the end of the year, would mark Hong Kong’s first de-SPAC transaction under the SPAC mechanism.

Ding Meng
Ding Meng

Ding Meng, a Hong Kong-based partner at Sidley Austin, attributed the limitation of the SPAC regime to the economic downturn. “This market condition makes it particularly challenging for de-SPAC targets to independently meet the listing standards under the Listing Rules. A tougher than usual overall market condition has only exacerbated the situation,” he said.

Jessica Zhou, the executive partner at White & Case’s Hong Kong office who specialises in capital markets, gave a more important reason that “the SPAC regime [in Hong Kong] is designed to track traditional IPOs more closely than the SPAC rules in other markets”.

Jessica Zhou
Jessica Zhou

Combined with the current economic climate, Zhou said certain requirements in the Hong Kong SPAC regime could dampen activity in the sector.

“The HKD1 billion minimum capital raising requirement means that only companies of a certain scale would be suitable for a de-SPAC transaction in Hong Kong, whereas there is no equivalent requirement in the US other than minimum market capitalisation,” said Zhou.

She also noted that the mandatory requirement for private investment in public equity from independent parties could influence a business’s decision.

Since the implementation of the SPAC regime in Hong Kong, 14 SPACs have submitted prospectuses on the HKEX. However, only five have received listing approval and none have completed a company acquisition to date.

But Zhou also affirmed that the stringent rules adopted by Hong Kong focusing on the quality of SPACs are beneficial for target companies seeking a de-SPAC listing.

Regarding the efficacy of these new mechanisms in the capital markets, Sidley Austin’s Ding emphasised that their success hinges on economic recovery.

“In a period of booming economic activities, both the primary market and secondary market investors are more willing to attach a high valuation to emerging companies, thus making compliance with the new listing regimes such as chapter 18C easier,” he said.

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