To revitalise GEM listing activities which have significantly declined since 2019, The Stock Exchange of Hong Kong Limited (the HKEx) has published its consultation paper on September 26, 2023 to seek market responses to its proposals for reforms in the GEM listing regime. This article provides an overview of the key proposals under the Proposed Reforms, mainly including the introduction of a streamlined transfer mechanism for eligible GEM issuers to transfer to the Main Board, a new alternative eligibility test for companies in the high-growth segment, and other major changes in the continuing obligations of GEM issuers.

STREAMLINED TRANSFER MECHANISM

To strike a balance between the assurance of market quality and the interests of small and medium enterprise (SME) stakeholders, the HKEx proposes to introduce major changes in the requirements for a transfer of listing from GEM to the Main Board under a streamlined approach. Under the proposed new regime, a transfer applicant may resort to a simpler path with considerably lower costs in terms of transfer of listing expenses and time to be incurred. Subject to the following proposed requirements to be demonstrated by the transfer applicant, the proposed streamlined approach would enable such applicant to apply for a transfer of listing without the need to (a) appoint a sponsor to conduct due diligence for its transfer and (b) issue a “prospectus-standard” listing document (except for the submission of certain application documents and the publication of announcements relating to the application of transfer and the completion of the transfer):

  1. meet all the qualifications for listing on the Main Board;
  2. have published its financial results for three full financial years as a GEM issuer with (i) ownership continuity and control; and (ii) no fundamental change in its principal business, throughout the said period prior to its transfer;
  3. meet the:
    1. daily turnover test: reached a prescribed minimum daily turnover threshold (to be set at either HKD$100,000 or HKD$50,000) on at least 50% of the trading days over a prescribed reference period of 250 trading days before the transfer application and until the commencement of dealings on the Main Board (the Reference Period);
    2. volume weighted average market capitalisation test: have a volume weighted average market capitalisation over the Reference Period (calculated as the sum of the daily market capitalisation multiplied by the ratio of the daily number of shares traded to the total number of shares traded for all the trading days over the Reference Period) that could meet the minimum market capitalisation requirement for Main Board listing; and
    3. clean compliance record requirement: no serious breach of the GEM Listing Rules, and not the subject of any investigation by the HKEx, or any ongoing disciplinary proceedings under Chapter 3 of the GEM Listing Rules over the 12 months preceding the transfer application and until the commencement of dealings on the Main Board.

Nonetheless, a GEM issuer may still apply for a transfer under existing requirements if it cannot meet the above eligibility requirements. To further reduce the cost of transfer of listing, the HKEx also proposes to exempt GEM issuers from the Main Board initial listing fee.

NEW ALTERNATIVE ELIGIBILITY TEST FOR HIGHD GROWTH ENTERPRISES

With a view to encouraging listings of high growth potential enterprises that are heavily engaged in research and development (R&D) activities, the HKEx proposes to introduce a new financial eligibility test. Under such test, a GEM listing applicant is expected to have:

  1. an adequate trading record of at least two financial years (including one-year ownership continuity and two-year management continuity);
  2. an expected market capitalisation of at least HKD$250 million at the time of listing;
  3. revenue of at least HKD$100 million in aggregate for the two most recent audited financial years, with year-on-year growth over the two financial years; and
  4. incurred R&D expenditure of at least HK$30 million in aggregate for the two financial years prior to listing, where the R&D expenditure incurred for each financial year must be at least 15% of its total operating expenditure for the same period.

In addition, the HKEx proposes to reduce the post-listing 24-month lock-up period imposed on controlling shareholders of GEM issuers to 12 months.

OTHER MAJOR CHANGES IN THE CONTINUING OBLIGATIONS OF GEM ISSUERS

In order to further stimulate GEM listing activities by providing a supportive environment, the HKEx proposes to align certain ongoing obligations with those of Main Board issuers through introducing the following major changes in the continuing obligations of GEM issuers:

  1. compliance officer and compliance adviser:  to remove the compliance officer requirement, shorten the period of engagement of the compliance adviser to align with that of the Main Board issuers, and remove certain GEM requirements relating to a compliance adviser's responsibilities to align with those of Main Board issuers; and
  2. quarterly reporting requirements: to remove such requirements to follow the existing interim and annual reporting requirements for Main Board issuers.

CONCLUSION

With the proposed measures above to boost GEM listing activities, it is expected that the proposed new regime could increase the competitiveness of capital market in Hong Kong for SMEs with lower eligibility thresholds for listing on GEM and reduced on-going compliance burdens subsequent to listing.

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