CSj reviews the key points in the Stock Exchange of Hong Kong consultation paper proposing new rules to expand Hong Kong’s listing regime to facilitate listings of companies from emerging and innovative sectors.

The Stock Exchange of Hong Kong Ltd (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Ltd (HKEX), published its New Board Concept Paper on 16 June 2017, proposing significant changes to Hong Kong’s listing regime. In the interests of boosting Hong Kong's overall competitiveness versus other major global listing venues, particularly in respect of attracting companies from emerging and innovative sectors, the Exchange proposed to expand the existing listing regime by introducing two new chapters to the listing rules to allow the listing of:

• biotech companies which do not meet the financial eligibility tests of the Main Board listing rules, and
• innovative and high-growth issuers that have weighted voting rights (WVR) structures, subject to additional disclosure and safeguards.

These proposals were further developed in the conclusions to the New Board Concept Paper published in December 2017 (New Board Concept Paper Conclusions). In addition to the proposals listed above, the Exchange proposed to modify the existing listing rules in relation to overseas companies to create a new secondary listing route to attract innovative issuers that are primary listed on a 'qualifying exchange'. These proposals were submitted for consultation in February 2018. This latest consultation paper offers more detail on the key issues that the three proposals discussed above raise for the Hong Kong market and sets out the draft amendments to the listing rules.

Investor protection

Since issuers listed under the proposed new biotech chapter in the listing rules would not meet any of the financial eligibility tests of the Main Board, these issuers potentially carry additional risks to investors. Accordingly, the proposals include eligibility and suitability criteria for determining appropriate applicants, a higher market capitalisation requirement, enhanced disclosure requirements, as well as restrictions on fundamental changes of business. Regarding issuers with WVR structures, the proposals closely follow the position set out in the Way Forward section of the New Board Concept Paper Conclusions. An applicant will be required to demonstrate that it is eligible and suitable for listing with a WVR structure by reference to a number of characteristics, including the nature of the company and the contribution of the proposed WVR beneficiaries. Recognising the potential risks associated with WVR structures, the Exchange has proposed safeguards, including limits on WVR power and measures to protect non-WVR holders’ right to vote, enhanced corporate governance requirements, as well as enhanced disclosure requirements. For the proposed new secondary listings chapter, the Exchange aims to strike a balance between facilitating listings of innovative companies that are primarily subject to regulation overseas and providing appropriate investor protection. As a result, it has proposed a new regime for three types of companies that are primary listed on a qualifying exchange (QE) in the US or the UK, namely:

1. Greater China issuers that were primary listed on a QE before the publication of the New Board Concept Paper Conclusions
2. those that were primary listed on a QE afterwards, and
3. non–Greater China issuers.

Regulatory oversight

Another issue to be addressed is the relative roles of the Exchange and the Securities and Futures Commission (SFC) in providing regulatory oversight and enforcement. Following discussions, the two regulators have signed an addendum (Addendum) to the Memorandum of Understanding Governing Listing Matters signed on 28 January 2003. Pursuant to arrangements under the Addendum, a new Listing Policy Panel (LPP) has been established as an advisory, consultative and steering body to initiate and centralise discussions on listing policy with broader regulatory or market implications. The LPP was set up based on the Joint Consultation Conclusions on Proposed Enhancements to The Stock Exchange of Hong Kong Ltd’s Decision-making and Governance Structure for Listing Regulation (published on 15 September 2017). The LPP consists of 12 members comprising senior representatives of the SFC, the Listing Committee, HKEX and the Takeovers and Mergers Panel. The LPP is not a committee under the SFC, HKEX or the Exchange. The role of the SFC as a statutory regulator has evolved to have a more direct presence in more serious listing matters. The Joint Consultation Conclusions clarified the role of the SFC as the statutory regulator in:

• administering the Securities and Futures Ordinance and the Securities and Futures (Stock Market Listing) Rules (SMLR), and
• supervising, monitoring and regulating the activities of the Exchange, including the Exchange’s role as the regulator in administering the listing rules.

The Exchange is the primary frontline regulator and remains the contact point for all listing applications, save in respect of concerns raised by the SFC under the SMLR. The SFC is the direct contact point on issues raised under the SMLR.

The next steps

If the proposals in the Exchange's latest consultation paper are implemented, a prospective listing applicant and its sponsor(s) may, after the listing rules are published, submit a formal pre-IPO enquiry regarding the interpretation of the final listing rules and their application to the prospective listing applicant’s circumstances. Before then, the Exchange will respond to any such enquiries on an informal basis. Companies may submit a formal application for listing under the new regime only after the listing rules to implement the regime come into effect. More information is available on the websites of the Stock Exchange of Hong Kong Ltd: www.hkex.com.hk and the Securities and Futures Commission: www.sfc.hk.