HKEX Consultation on GEM Listing Reforms

The number of new listings and funds raised on GEM (formerly known as the Growth Enterprise Market), which is the second board of The Stock Exchange of Hong Kong Limited (“HKEX”), have significantly declined since 2019, causing concerns in the market and drawing the attention of the regulators and the Hong Kong Government. The HKEX believes that such decline is attributable to the financial performance of GEM-listed issuers being adversely affected by the COVID-19 pandemic and the emergence of alternative listing venues for Small and Medium-sized Enterprises (“SME”) in Mainland China. Established in 1999, GEM aims at allowing companies that fail to meet the Main Board profit requirement to raise funding. The GEM currently has 334 issuers with a total market capitalisation of approximately HK$78 billion, representing just 0.2% of the HKEX total.

SMEs are an important driving force in Hong Kong’s economic development and according to the Trade and Industry Department of the Hong Kong Government, there were about 362,000 SMEs in Hong Kong as at December 2022. They constituted 98.5% of the Hong Kong business units and accounted for about 44.4% of the private sector employment in Hong Kong. Recognising the importance of SMEs to the Hong Kong economy and their reliance on GEM as a source of funding, the HKEX has conducted a review on the GEM listing regime. On 26 September 2023, the HKEX published a consultation paper (the “Consultation Paper”) on proposed listing reforms for GEM to facilitate fundraising for SMEs and technology start-ups. This Consultation Paper seeks to gather market feedback on proposed changes to the rules governing the listing of securities on GEM made by the HKEX (the “GEM Listing Rules”).

Summary of Key Proposals

Key proposals set out in the Consultation Paper are summarised below:

1.    New Alternative Eligibility Test – market capitalisation/ revenue/ R&D test 

There are market thoughts that the current minimum eligibility thresholds for listing on GEM are too high and this has unnecessarily barred some SMEs from pursuing a listing on GEM to raise funding for its business. The HKEX proposes to address this concern by introducing a new eligibility test that specifically focuses on high-growth enterprises that actively participate in research and development (“R&D”). To meet this test, a company seeking to list on GEM must have incurred a minimum aggregate R&D expenditure of HK$30 million over the two financial years preceding the proposed listing. Furthermore, the R&D expenditure for each financial year must constitute at least 15% of the total operating expenditure for that particular period. In this connection the HKEX has stated that it expects the amount of R&D expenditure to primarily comprise: 

1. the cost of personnel engaged; 
2. the depreciation, service fees or other directly attributable costs of equipment or facilities used; 
3. the amortisation of intangibles used; and 
4. the costs of materials consumed in R&D activities. 

Further guidance will be published on HKEX’s website regarding the items which would qualify as R&D expenditure. In addition to the above, the new eligibility test also requires: 

1. a trading record of at least two financial years; 
2. an expected market capitalisation of at least HK$250 million at the time of listing; and 
3. aggregate revenue of at least HK$100 million for the two most recent audited financial years, with year-on-year growth. 

2.    New Streamlined Transfer Mechanism 

A new (and additional) streamlined transfer mechanism has been proposed to allow eligible GEM issuers to transfer from GEM to the Main Board of the HKEX without having to appoint a sponsor (which would necessitate a due diligence of the listed company’s business activities) or producing a “prospectus-standard” listing document. To qualify for transfer under this proposed new mechanism, an applicant must:

1. fulfil the qualifications for listing on the Main Board;
2. have published financial results for three full financial years as a GEM issuer whilst maintaining ownership continuity and control without any significant changes to its principal business;
3. satisfy a daily turnover test, where a minimum daily turnover threshold (either HK$100,000 or HK$50,000) must be reached on at least 50% of trading days over a prescribed reference period;
4. meet a volume weighted average market capitalisation test that aligns with the minimum market capitalisation requirement for Main Board listing; and
5. have a clean compliance record over the 12 months preceding the transfer application and until the commencement of dealings on the Main Board. 

It shall be noted that the new transfer mechanism has not been proposed to override the existing regime. GEM issuers which are unable to meet the above eligibility requirements can still apply for a transfer under the existing mechanism.#

3.    Alignment of certain continuing obligations with the Main Board

The HKEX has proposed a number of amendments to the GEM Listing Rules in order to align certain continuing obligations for GEM issuers with those for Main Board issuers. These proposed amendments include: 

1. the removal of mandatory quarterly reporting requirement; 
2. removal of existing requirement for an executive director of a GEM issuer to act as the issuer’s compliance officer; and
3. a shortening of the engagement period and lessening the responsibilities of the compliance adviser. 

The reduction of the above measure will reduce the on-going compliance burdens for GEM issuers after its listing which has become prohibitively expensive as those on the Main Board.

Potential Updates on ESG-related Requirements

In addition to the above, the HKEX has also explicitly recognised that GEM issuers may have limited resources for meeting environmental, social and governance (“ESG”) reporting requirements relative to Main Board issuers and intends to take a proportionate approach in implementing ESG-related requirements for GEM issuers. The HKEX will provide updates and guidance on this matter to the market in due course.   

Response to the Consultation Paper

The HKEX is currently inviting market feedback on its proposals and the corresponding changes to the GEM Listing Rules. The public consultation period will concludes on 6 November 2023. It is anticipated that the reforms will become effective in the first quarter of 2024.

Comments

The HKEX’s proposed reforms for GEM has been long time coming and is the latest in a string of changes made by the HKEX in 2023 to enhance its status as a global premier capital markets centre after the introduction of the new Chapter 18C listing regime for specialist technology companies. Whilst the reforms will not address all of the concerns of every stakeholder, it is a step in the right direction to provide a supportive, thriving and prosperous environment for SMEs which is a bedrock of Hong Kong’s economy. The proposed listing reforms aims to achieve a delicate balance between investor protection and facilitating fundraising for SMEs, which hopefully will bring long overdue support to improve the competitiveness of GEM in the region and enhance the long term success of GEM.