Selecting the right listing for technology specialists

Specialist technology companies (STCs) have been afforded a path to listing on the Stock Exchange of Hong Kong (SEHK). The exchange published the conclusions of its consultation on the matter on 24 March 2023.

The conclusions, plus the Main Board Listing Rules in appendix IV and the Guidance Letter on Specialist Technology Companies in appendix V, took effect on 31 March 2023. As a result, STCs are now eligible to apply for listing under chapter 18C of the Main Board Listing Rules.

With this, the SEHK aims to attract STCs and bolster Hong Kong’s competitiveness with capital markets in the US and mainland China. Compared to the initial consultation paper in October 2022, March’s final consultation conclusions reflect market expectations for reducing the listing requirements for STCs, with the goal of attracting more promising companies to list in Hong Kong. This move has, to some extent, broadened the listing eligibility criteria for specialist technology companies.

The scope

STCs are those primarily engaged, either directly or through their subsidiaries, in researching and developing one or more specialist technology products within acceptable sectors. They also engage in commercialising and/or selling these products. The SEHK adopts a combination of a list-based approach and a case-by-case review to define specialist technology industries and acceptable sectors.

The SEHK offers lists of both in its guidance letter. Compared to the consultation paper, the expanded list includes sectors that simultaneously employ advanced hardware and software, such as quantum information technology and computing.

The acceptable sectors for smart glass have also been broadened to encompass advanced inorganic materials, covering special metals and alloys, advanced ceramics and special glass.

Additionally, advanced composite materials have been included, covering high-performance composite materials and advanced processing of composite materials.

The SEHK also makes clear that:

• Companies primarily engaged in facilitating transactions and generating revenue from transaction commissions or fees (including certain fintech companies) will not be listed as STCs. The reason is that such companies provide matching services rather than selling specialist technology products.
• Companies involved in blockchain technology and digital asset-related businesses will also not be listed in the category of specialist technology industries and acceptable sectors. This is because the success of most of these companies relies on expanding mining capacity rather than adopting new technologies.

In its consultation conclusions, the SEHK specifically notes that companies not included in the list may still be considered within the realm of specialist technology industries and acceptable sectors if they exhibit the following characteristics:

• High growth potential;
• Be able to prove that their success is based on adopting new technologies in their core business and/or applying industry-relevant science and technology to innovative business models. This distinction sets them apart from traditional market players serving similar consumers or end-users; and
• Research and development (R&D) should contribute substantially to the company’s expected value, serving as a primary activity and accounting for a significant portion of its expenses.

Capitalisation threshold

STCs are not required to be profitable as a prerequisite for listing, but they must meet certain criteria based on “revenue + expected market capitalisation” or expected market capitalisation indicators.

In contrast to the consultation paper, the conclusions have revised the minimum market capitalisation requirements for listing:

• Commercialised companies now need to achieve a market capitalisation of HKD6 billion (USD769 million), reduced from the initial HKD8 billion.
• Similarly, uncommercialised companies are now required to reach a market capitalisation of HKD10 billion, lowered from the previous HKD15 billion threshold.

These adjustments notably decrease the listing thresholds for both commercialised and uncommercialised companies.

R&D expenditure

Specialist technology companies are required not only to have engaged in the R&D of specialist technology products for at least three fiscal years prior to listing, but also to meet the minimum R&D expenditure requirement, similar to the listing application on the Star Market (Science and Technology Innovation Board) of the Shanghai Stock Exchange (SSE).

The SEHK consultation conclusions introduce a new provision by setting a minimum percentage of R&D expenditure for uncommercialised companies close to achieving commercialisation and provide more flexibility in terms of both the minimum percentage of R&D expenditure and the applicable period.

This adjustment is aimed at accommodating changes or fluctuations in companies’ operating conditions during the period of their business records.

Third-party investment

Before being listed, specialist technology companies must secure third-party investment to provide independent third-party verification, ensuring that their market capitalisation at the time of listing receives sufficient and independent market support.

To meet this requirement, the SEHK has quantified third-party investment by stipulating that applicants must fulfil two criteria simultaneously: obtaining investment from pathfinder sophisticated independent investors; and investment from all sophisticated independent investors.

Listing path

The new listing regime comes as a significant boon for unprofitable non-biotech enterprises. Particularly noteworthy is the provision of a listing path for uncommercialised non-biotech companies, which is not currently supported in the vetting practices of the SSE’s Star Market.

Although the SEHK has expanded the eligibility criteria for specialist technology companies on market feedback, the market capitalisation threshold remains relatively higher compared to SSE’s Star Market. Therefore, for profitable technology companies with low valuations, the Star Market may prove to be a more suitable choice.

On the other hand, companies with higher valuations can carefully evaluate their individual circumstances and other listing requirements to determine the most appropriate listing path, choosing between the Star Market and the SEHK.

Spring Zhang is an senior partner at Brightstone Lawyers. She can be contacted at +86 189 1760 5469 or by e-mail at zhangq@brightstonelawyers.com
Grace Zhao is a partner at Brightstone Lawyers. She can be contacted at +86 189 1760 5461 or by e-mail at glzhao@brightstonelawyers.com