The Securities and Futures Commission (the SFC) and the Stock Exchange of Hong Kong (HKEX or the Exchange) jointly announced on 23 August 2024 temporary modifications (the Temporary Modifications) to certain requirements relating to the listing of Specialist Technology Companies (STCs) and De-SPAC Transactions. These modifications to the Main Board Listing Rules and the relevant guidance materials will apply temporarily for a fixed period of three years, from 1 September 2024 to 31 August 2027.
The Temporary Modifications are introduced to enhance the existing listing framework so that it maintains Hong Kong’s edge as a top listing destination for innovative and fast-growing technology companies. The content of the Temporary Modifications mainly include:
- Reducing the initial market capitalisation threshold for STCs listing via Chapter 18C
- Reducing the minimum independent third-party investment required for a De-SPAC Transaction
- Aligning the independence test for third-party investors in a De-SPAC Transaction with the Chapter 18C independence test for sophisticated independent investors
Key features of the Temporary Modifications are discussed below.
1. SPECIALIST TECHNOLOGY COMPANIES
To attract high-growth, emerging and innovative technology enterprises to list in Hong Kong, the Exchange introduced a new listing regime for qualified STC [1] under Chapter 18C of the Main Board Listing Rules, which came into effect 31 March 2023. Since then, the new listing regime received only lukewarm responses from listing applicants in a challenging market environment, despite the revenue thresholds in the Main Board Listing Rules being significantly lowered for qualified STCs. For more details about the definition of qualified STCs and the specific listing requirements under the Chapter 18C, please refer to our previous LawFlash, published in March 2023.
Temporary Modification 1: Reduction in Initial Market Capitalisation Threshold for Listing
The market capitalisation threshold for both Commercial Companies and Pre-Commercial Companies under Main oard Listing Rule 18C.03(3) will be reduced by the following amounts:
- For Commercial Companies, [2] the minimum initial market capitalisation at the time of listing will be reduced from HK$6 billion to HK$4 billion
- For Pre-Commercial Companies, [3] the minimum initial market capitalisation at the time of listing will be reduced from HK$10 billion to HK$8 billion
The modified initial market capitalisation thresholds will apply to all listing applicants under Main Board Chapter 18C that meet the following criteria:
- The expected date of listing is on or after 1 September 2024
- The relevant listing applications (including all renewals of such applications) are submitted on or before 31 August 2027
This Temporary Modification recognises recent market conditions and intends to provide a viable listing pathway for new economy companies with high growth potential. As the time of writing, two companies have successfully listed on the Main Board under the Chapter 18C listing regime; one company has submitted Application Proof and is currently under review (as set forth in the table below). With the lowered market capitalisation requirement, we expect more commercial and pre-commercial high-tech unicorns to be eligible for the Chapter 18C listing regime.
2. DE-SPAC TRANSACTIONS
A Special Purpose Acquisition Company (SPAC) is a shell company that raises funds through its listing for the purpose of acquiring a business (a De-SPAC Target) at a later stage (a De-SPAC Transaction) within a predefined period after listing. Chapter 18B of the Main Board Listing Rules provides a listing pathway for SPACs in Hong Kong and sets out the requirements for De-SPAC Transactions. For more information, our LawFlash published in December 2021 details the key features of the Hong Kong SPAC listing regime.
Relevantly, Main Board Listing Rule 18B.40 currently requires a SPAC to demonstrate that the required minimum independent third-party investment has been committed by the time of announcing the De-SPAC Transaction, and the third-party investors must meet independence requirements consistent with those that apply to an independent financial adviser under Main Board Listing Rule 13.84.
Temporary Modifications 2: Reduction in Minimum Independent Third-Party Investment
This temporary modification reduces the minimum funds required to be raised from independent third-party investors, as specified in Main Board Listing Rule 18B.40, to the lesser of
- the currently prescribed percentage of the negotiated value of the De-SPAC Target as set out in Main Board Listing Rule 18B.41, or
- HK$500 million in value.
This temporary modification applies to all De-SPAC Transactions that are expected to be announced from 1 September 2024 to 31 August 2027.
The purpose of requiring independent third-party investment to complete a De-SPAC Transaction is to mitigate the risk of artificial valuation. The new minimum independent third-party investment requirements will continue to represent a significant commitment of “capital at risk” to help ensure that there is support for the valuation of the De-SPAC Target in a De-SPAC Transaction.
Temporary Modification 3: Independence Requirement for Third-Party Investors
The independence test for third-party investors in a De-SPAC Transaction pursuant to Main Board Listing Rule 18B.40 is modified to align with that for sophisticated independent investors (SIIs) in STCs (Chapter 18C Independence Test). [4]
The Chapter 18C Independence Test was designed to mitigate concerns related to difficulty in valuing STCs. The new independence requirements for third-party investors in De-SPAC Transactions are aligned with the Chapter 18C Independence Test for consistency and to address the difficulties experienced by SPACs in applying the independent financial adviser test, which was formulated for a different purpose.
Clarification: Definition Of ‘Sophisticated Investor’ for Independent Third-Party Investment
In tandem with Temporary Modification 3, the Exchange also amended its guidance materials that align the definition of “sophisticated investor” for independent third-party investment more closely with the Exchange’s requirement for identifying SIIs in STCs.
The table below sets out the new independence and sophistication requirements for third-party investors in De-SPAC Transactions.
The listing applicant must disclose the size (and the basis for determination) of the AUM, the fund or the investment portfolio (as the case may be) and any other information relevant to the sophisticated independent third-party investors in the following:
- The announcement of the De-SPAC Transaction (De-SPAC Announcement) referred to in Main Board Listing Rule 18B.44
- The listing document issued for the De-SPAC Transaction referred to in Main Board Listing Rule 18B.49 to substantiate that they have the relevant investment experience, knowledge and expertise to be considered sophisticated
Where the above information cannot be disclosed in detail for confidentiality reasons, the Exchange may accept alternative disclosures appropriate to the circumstances on a case-by-case basis, taking into account the factors set out in the relevant guidance that the Exchange has published. Such information should be given as of
- a date that is no more than six months prior to the date of signing of the definitive agreement for the investors’ relevant investment in the De-SPAC Transaction; and
- a date that is no more than six months prior to the date of the listing application of the Successor Company.
Temporary Modification 3 and the Clarification will apply to all De-SPAC Transactions that are expected to be announced from 1 September 2024 to 31 August 2027.
CONCLUSION
The Temporary Modifications demonstrate the joint effort of the SFC and the Exchange to address the change in market conditions since the introduction of both listing regimes, taking into account the Exchange’s experience gained from handling STCs’ listing applications and De-SPAC Transactions.
These modifications will provide greater flexibility and clarity for both issuers and investors, while maintaining the quality of the market. By granting easier access to public markets for a wider range of innovative high-tech companies, the Temporary Modifications are significant joint efforts by the SFC and the Exchange to inject new growth momentum in the capital market in Hong Kong.
While these modifications are temporary, the Exchange indicated it may review the requirements and conduct public consultation, if necessary. It therefore remains to be seen whether these “temporary” modifications will become “permanent” or whether any other modifications may be introduced in response to ongoing changes to the market conditions.
[1] An STC is a company primarily engaged in the R&D of, and the commercialisation and/or sale of, products and/or services that apply science and/or technology within an acceptable sector of specialist technology industry recognised by the Exchange, such as artificial intelligence and new green technology.
[2] A Commercial Company is a STC that has revenue of at least HK$250 million for its most recent audited financial year arising from its specialist technology business segment (Commercialisation Revenue Threshold).
[3] A Pre-Commercial Company is a STC that has not met the Commercialisation Revenue Threshold at the time of listing.
[4] The independence requirements for SIIs in Specialist Technology Companies are set out in Chapter 2.5 of the Guide for New Listing Applicants.
[5] As defined in Main Board Listing Rule 18B.01 with respect to the core connected person of the SPAC, or as defined in Main Board Listing Rule 1.01 with respect to the core connected person of the De-SPAC Target.
[6] “Investment Portfolio” means the aggregate value of the investment in investee companies as determined by the prevailing accounting standards. The Exchange will not consider consolidated subsidiaries to be investee companies.
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