Hong Kong Exchanges & Clearing (HKEX) will relax the revenue requirements for technology companies going public in the city, but a lawyer suggests clarifying the definition of eligible firms and strengthening disclosure requirements.
The HKEX said it is “studying how best to create a listing chapter to cater to the funding needs of large-scale advanced technology companies that are at an early stage of product commercialisation”. The market will be informed of any new developments in due course.
Bloomberg quoted sources familiar with the matter, reporting that the new chapter 18C will permit non-profits or non-revenue hard-tech companies to sell shares on the Hong Kong bourse, which was expected to be finalised as soon as the end of the year.
Hard-tech companies may include those in new energy, software-as-a-service (SaaS), platform-as-a-service (PaaS), smart manufacturing and robotics, semiconductors, quantum computing, autonomous driving and artificial intelligence.
The report also said that in terms of listing requirements, the HKEX would classify tech companies into either as firms pre-commercialisation or commercialised firms. Companies classed as firms pre-commercialisation are required to have a market capitalisation of more than USD2 billion at the time of its IPO.
The market capitalisation of commercialised firms will be at least USD1 billion, and revenue requirements of around HKD200 million to HKD300 million (UDS25 million to USD38 million), down from the HKEX’s current level of HKD500 million.
The above market capitalisation threshold is higher than the HKD1.5 billion required for pre-revenue biotech companies under chapter 18A.
Ronny Chow, partner and head of the corporate finance practice group at Deacons, said investors perceived pre-commercialised or pre-profit hard-tech companies as having higher risks. If the finalised scheme matches the reported details, “it is sensible for HKEX to require a much larger market cap”.
If the HKEX intended to lower the hurdle, he suggested it should “apply the shorter track record period, namely the two-year requirement for pre-revenue biotech listing applicants, to the listing applicants under the proposed new chapter 18C.”
Before the Bloomberg report, the Hong Kong Economic Journal had reported that aspiring to-be-listed tech companies must have developed main products and be financed by a certain number of independent third-party investors for a set period of time, while a longer post-listing lock-up period of 12 to 24 months was also intended for such companies.
Chow said pre-profit hard tech companies posed a similar risk to the capital markets as pre-revenue biotech firms under chapter 18A, therefore, a pre-revenue biotech-like system was preferable, such as the “requirement of having pre-IPO investments from independent sophisticated investors to validate the valuation”.
In 2018, Hong Kong implemented a significant reform in nearly 25 years by adding three new chapters 8A, 18A and 19C to the Listing Rules, allowing innovative companies with weighted voting right (WVR) structures, pre-revenue biotech companies and a new secondary listing route for companies – which are primary listed on other qualifying exchanges – to be listed on the HKEX. The latest move also aims to enlarge the innovative pool on the bourse.
“It is important to have a clear definition on the scope or type of companies, which are eligible to list under this new chapter 18C,” Chow said.
“Note the experience of some market participants and potential listing candidates with WVR structures that have had difficulties in demonstrating compliance with the criteria of ‘innovative company’, which may be a term with some degree of subjectivity.”