Hong Kong GEM Listing Reforms Take Effect
The Situation: The Growth Enterprise Market (the "GEM") listing activities in Hong Kong have been declining since 2019, and there was no new listed issuer on the GEM in 2022.
The Development: To encourage and facilitate the listings of small and medium-sized enterprises, the Stock Exchange of Hong Kong Limited (the "HKEx") decided to implement the GEM listing reforms with effect from 1 January 2024.
Looking Ahead: The reforms are expected to enhance the attractiveness of the GEM for new listing applicants while reducing the compliance cost of the existing GEM-listed issuers.
The GEM listing activities in Hong Kong have been declining since 2019, and there was no new listed issuer on the GEM in 2022. To encourage and facilitate the listings of small and medium-sized enterprises, the HKEx decided to implement certain GEM listing reforms with effect from 1 January 2024.
The features of the GEM listing reforms mainly include: (i) creating a new streamlined mechanism for the transfer from the GEM to the Main Board; (ii) introducing an alternative financial eligibility test for the high-growth enterprises heavily engaging in research and development ("R&D") activities; (iii) shortening the post-IPO lock-up period for controlling shareholders of the GEM issuers; and (iv) removing the mandatory quarterly reporting requirements for the GEM issuers.
The key GEM listing reforms are described in detail below.
Streamlined Transfer Mechanism
The HKEx introduced a new streamlined transfer mechanism under the new Chapter 9B of the Main Board Listing Rules to enable eligible GEM issuers to transfer to the Main Board without appointing a sponsor to conduct due diligence for its transfer and issuing a "prospectus-standard" listing document.
Each GEM issuer using this mechanism must:
- Meet all the qualifications that are required for listing on the Main Board;
- Comply with the HKEx's requirements in respect of its financial results for the three full financial years as a GEM-listed issuer prior to its transfer, with: (i) ownership continuity and control, and (ii) no fundamental change in its principal business throughout that period;
- Have a volume-weighted average market capitalization over the 250 trading days immediately preceding the transfer application and until commencement of dealings of its securities on the Main Board (the "Reference Period") that could reach the minimum market capitalization required for listing on the Main Board;
- Reach the minimum daily turnover threshold of HK$50,000 on no less than 50% of all trading days over the Reference Period; and
- (i) Not have been held to have committed a serious breach of any Listing Rules in the 12 months preceding the transfer application and until the commencement of dealings in its securities on the Main Board, and (ii) not be the subject of any investigation by the HKEx or any ongoing disciplinary proceedings under Chapter 3 of the GEM Listing Rules or Chapter 2A of the Main Board Listing Rules, in relation to a serious breach or potentially serious breach of any Listing Rules as at the date of the transfer application and the date when dealing in its securities commences on the Main Board.
A GEM issuer that cannot meet the above eligibility requirements would still be able to apply for a transfer under the Chapter 9A of the Main Board Listing Rules. Accordingly, such issuer would be required to appoint a sponsor to conduct due diligence and publish a "prospectus-standard" listing document for the transfer.
Alterative Financial Eligibility Test
The HKEx introduced a new alternative financial eligibility test for high-growth enterprises that are heavily engaged in R&D activities.
The GEM listing applicants using such test are required to have:
- A trading record of at least two full financial years;
- Market capitalization of at least HK$250 million;
- Revenue of at least HK$100 million in aggregate for the two most recent financial years (with a year-on-year growth of revenue over the period); and
- R&D expenditure of at least HK$30 million in aggregate for the two most recent financial years, where the R&D expenditure incurred for each financial year must be at least 15% of the total operating expenditure for the same period.
Reduction of Post-IPO Lock-Up Period for Controlling Shareholders
The HKEx reduced the post-IPO lock-up period imposed on the GEM issuers' controlling shareholders from 24 months to 12 months. In line with Main Board requirements, the controlling shareholders are prohibited from disposing any shares in the first six months, and are prohibited from disposing the shares in the second six months that would result in them ceasing to be the controlling shareholders.
Periodic Reporting Requirements
The HKEx removed quarterly reporting as a mandatory requirement for the GEM issuers and introduced it as a recommended best practice under GEM's Corporate Governance Code.
In addition, the HKEx aligned the GEM issuers' financial reporting timeframes with those for Main Board issuers. As a result, a GEM issuer must publish:
- Annual reports no later than four months after the end of each financial year;
- Interim reports no later than three months after the end of the first six months of each financial year; and
- Preliminary announcements of results for the first six months of each financial year no later than two months after the end of that six-month period.
It is expected that the GEM listing reforms will increase the GEM's attractiveness for listing and lessen the ongoing compliance burden borne by the existing GEM issuers. It is further believed that the GEM listing reforms could promote and facilitate the listings of the small and medium-sized enterprises on the GEM.
This Commentary discusses the key GEM listing reforms and is not intended to be a full summary of all the reforms.
As the GEM listing reforms were newly implemented, their interpretation and implementation may require close prior discussion with the primary Hong Kong regulators, creating opportunity to establish trusted working relationships. Our lawyers regularly take the lead in dealing with the regulators in devising and negotiating solutions to regulatory issues. Jones Day is ready to assist clients in the matters contemplated under the GEM listing reforms.
Two Key Takeaways
- The GEM listing reforms covered various aspects, including but not limited to the initial listing requirements, the continuing obligations, and the transfer mechanism from the GEM to the Main Board.
- It is expected that the GEM listing reforms will increase the GEM's attractiveness for listing and lessen the ongoing compliance burden borne by the existing GEM issuers, which could promote and facilitate the listings of the small and medium-sized enterprises on the GEM.