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E-MailWeiheng Chen and Ethan Jin are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini publication by Mr. Chen, Mr. Jin, KJ Tan ,and Can Yin.
On June 16, 2017, the Stock Exchange of Hong Kong Limited (SEHK) published a concept paper setting forth proposals for the establishment of a new listing board (the “New Board”), with a view to attracting “New Economy” companies (as described below). A separate but related consultation paper also was published on the same day to solicit market comments on proposed changes to the Growth Enterprise Market (GEM), the existing listing board for small to medium-sized growth enterprises, and amendments to the listing rules of the GEM and Main Board, the existing board for established enterprises. The proposed changes detailed in the second consultation paper aim to reposition the GEM and the Main Board in light of the proposed establishment of the New Board. This is the latest significant development in the SEHK’s efforts to broaden capital markets access in Hong Kong and to enhance the SEHK’s competitiveness in attracting New Economy companies, following debates over its listing regimes in recent years. The SEHK said that it has discussed the New Board proposals with the Securities and Futures Commission (SFC) in Hong Kong, and the SFC will continue to play a leading role in market regulation for the New Board.
Background
While Hong Kong has been the No. 1 market for initial public offering (IPO) funds raised globally in five of the past eight years, the SEHK has expressed concerns over: (i) the geographic concentration of issuers, with Mainland issuers accounting for 64 percent of the total market capitalization of companies listed on the SEHK as of May 2017 and 91 percent of IPO funds raised during the five years ended 2016; and (ii) the sector concentration in low-growth sectors, such as the financial and property sectors, which together make up 44 percent of the total market capitalization of companies listed on the SEHK as of May 2017—in sharp contrast to some of the fastest growing industries globally, such as pharmaceuticals, biotechnology, and life sciences (one percent); healthcare equipment and services (one percent); and software and services (nine percent, or one percent if Tencent is excluded).
Accordingly, the New Board is designed to enhance Hong Kong’s ability to attract companies from New Economy sectors with one or more of the following characteristics that currently disqualify them from listing in Hong Kong on either the GEM or Main Board: (i) pre-profit companies; (ii) companies with non-standard governance features, such as dual-class voting arrangements; or (iii) Mainland China-based companies that wish to list on the SEHK as a secondary listing venue.
Key Features
The proposed New Board would be divided into two segments to enable the calibration of shareholder protection standards based on the level of perceived risk in each segment: (i) “New Board Premium” for New Economy companies meeting the Main Board financial criteria; and (ii) “New Board Pro” for pre-profit/early-stage New Economy companies. Key features of the two segments are summarized below.
| New Board Premium | New Board Pro | |
| Admission Criteria |
|
|
| Suitability Assessment | In line with the Main Board | A “lighter touch” approach without application of existing Main Board or GEM standards |
| Investor Eligibility | Both retail and professional investors | Professional investors only |
| Role of Sponsor | Sponsor regime will apply | Sponsor regime will not apply; instead, a financial adviser is required to be appointed |
| Role of the Listing Committee | Listing approval by the Listing Committee | Listing approval by the Listing Department under delegated authority from the Listing Committee |
| Weighted Voting Rights (WVR) | Permitted with regulatory approach (disclosure-based or mandatory restrictions) yet to be determined | Permitted with regulatory approach (disclosure-based or mandatory restrictions) yet to be determined |
| Shareholder Protection Standards | Demonstration of shareholder protection standards equivalent to those in Hong Kong required | Demonstration of shareholder protection standards equivalent to those in Hong Kong NOT required |
| Companies Listed on a Recognized U.S. Exchange (i.e., NYSE and Nasdaq) |
|
Disclosure-based approach for WVR and other unconventional governance features |
New Economy Companies
The intention of the New Board proposal is to attract more New Economy companies—high-growth companies from innovative sectors. However, in light of the evolving nature of technology and the interactive relationship between the traditional and new economic sectors, no fixed definition is proposed, and the Listing Committee will retain the ultimate discretion to determine the listing eligibility for the New Board on a principle-based approach. The key principle is to identify companies whose businesses are in sectors where innovation, technology, intellectual property, and new ways of commerce in totality are the primary drivers for their growth and business success. Such companies may encompass a range of sectors, including biotech, healthcare technology, Internet and direct marketing, retail, Internet software and services, information technology services, software, technology hardware, and storage and peripherals. The SEHK aims to develop a set of guidelines for defining what constitutes a New Economy company for the purposes of listing on the New Board.
