Under the Hong Kong secondary board GEM Listing Rules, a new applicant applying for a GEM listing is required to demonstrate that throughout its active business pursuit period ("ABP Period") it has, either by itself or through one or more of its subsidiaries, actively pursued one focused line of business. Note 6 to Rule 11.12 of the GEM Listing Rules explains that the basis for such requirement is that the Exchange expects an applicant’s management to be devoting its attention towards advancing one core business rather than a variety of concerns which compete or may compete for their attention.

A track record of profit is not a requirement for GEM listing. What the listing applicant needs to demonstrate is that during the ABP period, it has focused its resources in developing one focused line of business for which the listing is being sought.

"Rational Basis" stated in Listing Decision LD39-1

Although there is no clear definition of the expression "one focused line of business" in the Listing Rules, the Exchange has clearly adopted a more flexible interpretation in one of its recent decisions.

In Listing Decision LD39-1, the listing applicant and its subsidiaries ("Group") had been engaged in the manufacture and distribution of 5 distinct products during the ABP Period. All its products contained natural ingredients extracted from animals and herbs. The question in this case was whether the listing applicant could be regarded as satisfying the one focused line of business requirement.

The submissions put forward by the Group for its business operation were as follows :-

  1. its principal products all contained natural ingredients;
  2. it applied its patented production know-how for preparation of natural ingredients to almost all of its products;
  3. it expanded its products range into several categories in order to maximize the utilization of the natural ingredients constituting its principal raw materials. For example, different products might contain ingredients extracted from different parts of the same animal; and
  4. its products were sold through the same distribution channel, namely through stores, shops and supermarkets.

The Exchange took the view that an applicant which had been engaged in multiple business activities could still be regarded as engaging in one focused line of business and qualified for GEM listing provided that there was a rational basis for the activities of the company to be conducted in one enterprise, and all material business activities of the listing applicant have been conducted in the 24 months constituting the ABP Period. Based on such interpretation of Rule 11.12 and having regard to the submissions put forward by the Group, the Exchange decided that the business operation carried on by the Group satisfied the one focused line of business requirement.

This decision provides a useful guide to the current approach followed by the Exchange in determining the one focused line of business requirement. In this case, it is noted that, although the Group’s 5 distinct products all contained natural ingredients, the extent and the type of the natural ingredients being used by the products in each category did not seem to be of concern in determining the one focused line of business requirement.

It should be further noted that the term "natural ingredients" has a very wide meaning. It basically covers everything created by nature and "nature" by itself is equally capable of having an indefinite meaning. Thus, without imposing any minimum proportion or a specified range of natural ingredients being used in the 5 distinct groups of products for the purpose of determining the one focused line of business, the products sold by the Group in one category could be substantially different from the products sold in the other categories. The absence of a correlation requirement to strengthen the association between the different product lines indicates a liberal approach by the Exchange in that case in addressing the one focused line of business requirement and in determining whether a listing applicant has been "devoting its attention towards advancing one core business".

The "rational basis" test formulated in the LD39-1 decision was adopted by the Exchange in a subsequent GEM listing case. In that case, the applicant employed the same technology for its activities but had customers in 4 different business sectors during the ABP period. By applying the rational basis test, the applicant was considered to have been operating one focused line of business.


From the LD39-1 decision it is noted that the "rational basis" adopted by the Exchange is a very flexible criterion, which is definitely good news for those multiple business companies which are interested in applying for a GEM listing. The threshold for GEM listings has effectively been lowered. After publication of the LD39-1 decision, companies who are engaging in multiple business activities can now consider applying for a GEM listing provided that they can establish a rational basis for their different business activities. In addition, such applicants need to establish that all their material business activities have been conducted in the 24 months constituting the ABP period. This liberal approach will make it easier for companies to apply for GEM listings in the future.

Solicitors in our Corporate Commercial Department regularly advise on corporate finance and securities matters. If you want a copy of LD39-1 decision or any advice on corporate finance or securities matters, please let us know.

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