Understanding the new listing regime

The Hong Kong Exchanges and Clearing Limited (HKEX) amended and added three new chapters, namely "Biotech", "Weighted voting rights" and "Secondary listing of qualifying issuers" to the Listing Rules with the intention to bring more emerging and innovative companies to Hong Kong. The amendments came into effect on 30 April 2018.

With the exception of mining companies, companies applying for listing on the Main Board must meet either the profit test, the market capitalisation/ revenue/ cash flow test, or the market capitalisation/ revenue test. All these tests are known collectively as Financial Eligibility Tests. Under the new listing regime (Chapter 18A of the Listing Rules), biotech startups that are yet to record revenues and do not meet the tests can apply for listing if they can demonstrate the following features.

• Business: Companies must have at least one core product beyond the concept stage. They must have engaged with the research and development (R&D) of the core products under substantially the same management for at least two years prior to listing. Funds to be raised from the listing must be primarily used on the relevant R&D. Core products can refer to small molecule drugs, biologics or medical devices (including diagnostics), which the company owns the relevant patent or intellectual property.

• Market capitalisation: At the time of listing, companies must have a minimum expected market capitalisation of HK$1.5 billion.

• Working capital: The working capital, including the capital raised from the listing, must cover at least 125% of the companies’ costs for the next 12 months.

• Third-party investment: Companies must have previously received meaningful third-party investment from at least one sophisticated investor, e.g. a dedicated healthcare or biotech fund, a major pharmaceutical/healthcare company or its venture capital fund, or an investor, investment fund or financial institution with minimum assets under management of HK$1 billion, at least six months before the date of the proposed listing. The investment must remain at the Initial Public Offering.

The Hong Kong stock market has always adhered to the principle of "one share, one vote". However, as many Mainland and overseas companies in the innovative sectors are using the WVR structure, a new "WVR" chapter (Chapter 8A) has been added to the Listing Rules to attract these companies. WVR companies can apply to list in Hong Kong if they can demonstrate the following features:

• Business: The core business of these companies must have applied new technologies, creative ideas or new business models that can differentiate them from existing competitors. They should also demonstrate that its success is attributable to its unique features and intellectual property i.e. new technologies, innovation or new business model. R&D is a significant contributor of its expected value and most of the expenses must be used on R&D. Compared to the total value of tangible assets, the market capitalisation or total value of intangible assets of these companies is extremely high. Last but not least, companies must have a proven track record of high business growth.

• Market capitalisation: The expected market capitalisation at listing must be no less than HK$10 billion. If companies have an expected market capitalisation less than $40 billion, they must have HK$1 billion in revenue for the most recent year. 

• WVR holders: They must be individuals whose skills, knowledge or strategic direction have contributed to the growth of the business. The WVR holder must be a director of the company at time of listing, and actively participates in an executive role within the business and has contributed significantly to the growth of the business.

To facilitate Greater China and international companies from innovative sectors to seek secondary listing in Hong Kong, a chapter on “Secondary listing of qualifying issuers” (Chapter 19C) has been added to the Listing Rules. Corresponding amendments in the Joint Policy Statement of 2013 were also made. The following features must be demonstrated in these innovative companies:

• Compliance record: Companies must be listed in a Qualifying Exchange (the New York Stock Exchange, NASDAQ or the Main Market of the London Stock Exchange (and belong to the UK Financial Conduct Authority’s “Premium Listing” segment)). They must also have a track record of good regulatory compliance of at least two full financial years on a Qualifying Exchange.

• Market capitalisation: International companies without a WVR structure must have an expected market capitalisation of at least HK$10 billion at the time of its secondary listing in Hong Kong.
  Companies with a WVR structure, or Greater China companies must also have an expected market capitalisation of at least HK$10 billion at the time of its secondary listing in Hong Kong. If companies have an expected market capitalisation less than $40 billion, then they must have $1 billion in revenue for the most recent year.

The Hong Kong Stock Exchange has issued guidance letters for companies applying for listing as biotech startups, WVR companies, as well as those applying for secondary listing in Hong Kong.