GEM and Main Board Listing Rule Changes effective February 2018
The Stock Exchange published its Consultation Conclusions on Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules (the Consultation Conclusions) on 15 December 2017 stating that it will implement virtually all the amendments to the Listing Rules proposed in its June 2017 Consultation Paper on Review of the Growth Enterprise Market and Changes to the GEM and Main Board Listing Rules (the Consultation Paper).
The Hong Kong Listing Rule amendments, which took effect on 15 February 2018, reposition GEM as a standalone market for small and mid-sized companies. GEM is no longer a stepping stone to the Main Board. Changes to the Hong Kong Listing Rules raise the listing thresholds for both the Main Board and GEM with higher market capitalisation requirements of HK$500 million for the Main Board and HK$150 million for GEM, and corresponding increases in the value of the public float on listing to HK$125 million (from HK$50 million) for the Main Board and HK$45 million (from HK$30 million) for GEM. The increased size of Main Board listed companies is aimed at a clearer delineation between the companies listed on the two boards.
Key GEM Listing Rules Changes
- GEM Name Change
To reflect the repositioning of GEM as a market for small and mid-sized companies, the names “Growth Enterprise Market” and「創業板」have been changed to “GEM”.
- Higher entry requirements for GEM listing applicants
The following listing requirements have been raised:
the minimum cash flow requirement for GEM applicants has been increased to HK$30 million (from HK$20 million);
the minimum expected market capitalisation for GEM applicants at the time of listing has been increased to HK$150 million (from HK$100 million); and
the minimum value of GEM companies’ public float at the time of listing has been raised to HK$45 million (from HK$30 million).
- 10% public offering requirement
A mandatory public offering requirement of at least 10 per cent of the total offer size now applies to all GEM IPOs. It was previously possible to list on GEM by way of placing only. The allocation of offer shares between the public and placing tranches and the clawback mechanism have been aligned with Practice Note 18 to the Main Board Rules.
- Two year post-IPO lock-up
The post-IPO lock-up on controlling shareholders of GEM issuers has been extended so that they:
cannot dispose of any of their equity interest in a GEM issuer within the first year of listing; and
cannot dispose of any interest in the subsequent year that would result in them ceasing to be a controlling shareholder as defined under GEM Listing Rule 1.01.
- Placing to core connected persons, connected clients and existing shareholders
The GEM Listing Rules on placing to core connected persons, connected clients and existing shareholders and their respective close associates have been aligned with those under Appendix 6 to the Main Board Listing Rules and Guidance Letter HKEX-GL85-16. As a result, placing to core connected persons, connected clients and existing shareholders, and their respective close associates, now requires the Exchange’s waiver/consent.
- Removal of the streamlined process for GEM transfers to the Main Board
GEM has been repositioned as a stand-alone board and the GEM Streamlined Process for transfer to the Main Board has been removed. As a result, companies seeking to transfer from GEM to the Main Board are required to appoint a sponsor and produce a “prospectus standard” listing document.
The Exchange did not however proceed with its proposal to require GEM transfer applicants to have published and distributed at least two full financial years of financial statements after their GEM listings. This is because it would effectively require a GEM issuer transferring to the Main Board to have a four-year track record (i.e. the two-year track record requirement for a GEM listing and the proposed two full financial years after GEM listing) which would be a more onerous requirement than the three-year track record requirement for Main Board listing applicants. Nor has the Exchange adopted the proposed extension of the period during which a company transferring from GEM to the Main Board must not have been subject to any disciplinary investigation by the Exchange in relation to a serious or potentially serious breach of any Listing Rules to 24 months (from the current 12 months).
- Unwinding the delegated authority
The unwinding of the authority to approve GEM listing applications from the Listing Division to the Listing Committee will be implemented at a later date once the outcome of a proposed consultation on the system for decisions of the Listing Committee in 2018 is published, or such earlier date as is considered appropriate.
- Mandatory sponsor requirement for transfer of listing from GEM to the Main Board
Transfers of listing from GEM to the Main Board require the GEM issuer to appoint a sponsor at least two months before the submission of its listing application.
- GEM Name Change
Key Main Board Listing Rules Changes
Higher Entry Requirements
The minimum expected market capitalisation of Main Board applicants at the time of listing has been increased to HK$500 million from HK$200 million.
The required minimum value of Main Board companies’ public float at the time of listing has risen to HK$125 million from HK$50 million.
Implementation and transitional arrangements
- Listing applications submitted before 15 February 2018
All listing applications received by the Exchange before 15 February 2018 were processed in accordance with the GEM or Main Board Listing Rules in force at the date of the Consultation Conclusions (i.e. 15 December 2017). Only one renewal of such applications is permitted thereafter.
- Listing applications submitted on or after 15 February 2018
Applications received on or after 15 February 2018 are processed in accordance with the amended GEM or Main Board Listing Rules, as the case may be.
- GEM transfer applications submitted before 15 February 2018
All applications to transfer from GEM to the Main Board that were submitted before 15 February 2018 and had not lapsed, been rejected or returned as at that date, were processed under the GEM Streamlined Process and their eligibility for the Main Board was assessed in accordance with the Main Board Listing Rules in force as at 15 December 2017. GEM Transfer applications made before 15 February 2018 are permitted only one renewal of such applications.
- 3 Year transitional period for issuers listed on GEM as at 16 June 2017
The Consultation Conclusions provide for a transitional period of three years ending on 15 February 2021. During the transitional period, companies which as at 16 June 2017 were either already listed on GEM, or had submitted a valid listing application for listing on GEM and subsequently listed on GEM pursuant to that application (or a renewal of such application) (together Eligible Issuers), can apply to transfer to the Main Board and have their eligibility for the Main Board assessed in accordance with the Main Board Listing Rules in force as at 15 December 2017.
The following requirements apply to Eligible Issuers submitting an application to transfer to the Main Board during the transitional period:
applicants that have changed their principal businesses and/or controlling shareholders since listing on GEM are required to:
- appoint a sponsor to conduct due diligence; and
- publish a listing document as a new listing applicant to the Main Board; and
applicants that have not changed their principal businesses or controlling shareholders since listing on GEM, only need to:
prepare a GEM Transfer announcement in connection with their GEM Transfer which provides investors with a concise update of the issuer’s affairs during the most recent full financial year and up to the date of the GEM transfer announcement as required in Appendix 28 to the amended Main Board Listing Rules; and
appoint a sponsor to conduct due diligence in respect of their activities during the most recent full financial year and up to the date of the GEM Transfer announcement to ensure that the information in the GEM Transfer announcement is accurate, complete and not misleading.
For issuers transferring to the Main Board under paragraph (b) above, due diligence must be conducted in accordance with the standards expected of sponsors under paragraph 17 of the SFC’s Code of Conduct and the principles set out in paragraph 2 of Practice Note 21 to the Main Board Listing Rules (for this purpose reference to listing document in paragraph 2 of Practice Note 21 to the Main Board Listing Rules shall be substituted with reference to the GEM Transfer announcement).
The sponsor is expected to be closely involved in the preparation of the GEM Transfer announcement. As applicants are not required to publish a listing document in connection with their GEM Transfer applications, provisions of paragraph 17 of the SFC’s Code of Conduct referring to the preparation of a listing document, application proof, the contents of a listing document and an expert report do not apply.
GEM transfer applications that are not submitted (i) before 15 February 2018 or (ii) by an Eligible Issuer during the transitional period, are subject to the amended Main Board Listing Rules.
- Listing applications submitted before 15 February 2018