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Shaping the future of our IPO market

Updated: 15 Dec 2017
Charles Li Direct Page

Today the Hong Kong market has decided to take a big step forward and secure our relevancy as a premier global capital formation centre. Following an extensive market consultation, we have reached a clear consensus that Hong Kong must broaden its listing regime and proactively embrace the new economy.

We have truly come a long way. Think back to just four years ago, in 2013: the thought of welcoming pre-revenue companies or those with weighted voting rights would’ve been almost unthinkable. But as the years have passed, and more exciting new internet and e-commerce stars have emerged in China alongside the further growth of US tech giants, we began to ask ourselves if we were doing enough to compete.

I wrote a blog in 2013 that shared multiple perspectives on reform, with one key takeaway: whatever we do, it should be a pro-active decision. We shouldn’t hold on to the status quo because of fear of change; if we were to decide to maintain the status quo, it should be because we felt, in our hearts, that it was the right way forward. For us to do that, we needed to look honestly at the question of our competitiveness and have a thorough debate about the benefits and consequences of different actions or inactions. We shouldn’t be swayed by emotional arguments or be distracted by the circumstances of any one particular company.

Our market has evolved a lot over the past four years, and the time was right for us to issue a Concept Paper on listing reform. We received so many responses with so many ideas, covering a wide spectrum of possibilities to enhance our competitiveness. While there was some variation in precisely how to move forward, the market was unequivocal in its view that we need to change; we need to welcome companies to our market that better reflect the drivers of the new global economy, companies that are transforming existing industries and shaping new ones. As a global financial centre, our stakeholders have told us they don’t want to miss this chance.

Our initial proposals included the creation of a New Board PREMIUM and New Board PRO, each with different listing and investor eligibility requirements depending on the risk associated with each board. The market told us clearly that all new listings should be held to the same high vetting standards as all other listed companies in Hong Kong, and questioned why mom and pop investors would be excluded from certain potential high-growth segments of the market. They felt it would be simpler and less complicated to include companies that are pre-revenue, pre-profit or employ weighted voting rights (WVR) to be included on the Main Board.

We therefore propose creating two new chapters to the Main Board to accommodate new economy companies that use WVR and pre-revenue companies, which will broaden our issuer base and diversify our capital market.

In formulating our proposals, our goal was to look at a number of ways we could open the door a little bit wider to welcome a broader diversity of companies to our market. Accepting WVR with adequate protections is one component of that plan. Whatever views we may have with respect to WVR, the competitive reality is Hong Kong can’t afford to rule out these companies solely on the basis of their use of WVR.

Another new chapter allowing pre-revenue companies would initially apply only to the biotech sector because it has some particularly unique characteristics. Biotech companies make up a majority of pre-revenue listings globally and the sector is strictly regulated under a regime that sets external milestones on development. This provides a bit of a measuring stick for investors, and gives them an idea of how to judge companies that do not have traditional indicators of performance, like revenue or profits, as their products are not yet approved to be sold in the market.

If pre-revenue companies or those with WVR list in our market, it would trigger additional investor protection safeguards.

With respect to investor protection in the context of WVR, it is important to note the distinction between two different questions: (i) how to protect minority investors against possible misconduct by controlling shareholders and (ii) how controlling shareholders obtained their controlling power. Our proposed WVR rules do not alter any of the measures in the current listing rules related to the first question; the proposed WVR rules only address the second question by allowing founders of “new economy” companies to acquire controlling powers through contractual arrangement rather than the conventional model that only looks at the investment of capital. There are obviously additional measures to ensure that investors are protected against misuse of the powers acquired. Those protections include prohibiting the issuance of new WVR shares after listing, limiting who can hold WVR shares and the transferring of those shares, and much more. (You can read more information here.)

Admittedly, coming up with a precise definition of “new economy” is a challenge, which is why we are proposing a requirement that the Listing Department put the factors that determine eligibility into guidance letters.

We are also creating a new route to secondary listings in Hong Kong to attract companies from emerging and innovative sectors. We are aware that many successful new economy companies already listed in the US and UK would benefit from these reforms.

These proposals would re-structure our market with the Main Board catering to established and high-growth companies with large market capitalisations, and GEM serving as a board for small and medium-sized firms. With stricter rules and heightened listing criteria, we expect GEM to attract quality issuers that meet our high standards.

Hong Kong is already a leading global IPO centre, and with these reforms we will be presenting an even more compelling case to new economy companies when they choose their listing venue. In fact, we’ve seen a marked increase in the number of listing enquiries we’ve received of late.

In closing, I want to give my heartfelt thanks to the entire market for considering these issues honestly and openly. The Hong Kong Government and the Securities and Futures Commission have also done a deep dive into the possibilities for reform and have guided us to find solutions that work. They deserve our sincere respect and gratitude.

We have come a long way, but we are not at the finish line yet. We will consult the market on Listing Rule amendments in the first quarter of next year, so we will be calling on the market once again to share your thoughts and suggestions.

When our market comes together as a collective to push forward positive change, there is nothing we can’t accomplish. I am confident that together, we will put Hong Kong in a position to capture the next generation of opportunities and ensure our long-term prosperity.


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