Hong Kong Stock Exchange welcomes Specialist Tech Companies under the new Chapter 18C listing regime

On 31 March 2023, the Stock Exchange of Hong Kong Limited (the "Stock Exchange") introduced the new Chapter 18C listing regime (the "STC Regime") for "Specialist Technology Companies" ("STCs") to the Main Board Listing Rules. The regime comprises a set of listing eligibility requirements that caters to promising new technology companies with high growth potential across five frontier categories, with the aim of bolstering Hong Kong as a listing venue for innovative enterprises. This article briefly covers the eligibility criteria for listing applicants under the STC Regime, as well as some thoughts and observations about this regulatory development and the broader commercial context. 

Qualifications for Listing under the STC Regime 

A.    Specialist Technology Companies 

STCs are defined in Guidance Letter HKEX-GL115-23 (the "STC Guidance Letter") as companies operating within an acceptable sector of five categories of "specialist technology" industries, summarized as follows: 

An applicant that does not fall within the scope of the existing list of specialist technology industries and acceptable sectors may still be considered to be an STC under the STC Regime if it can demonstrate, in a pre-IPO enquiry to the Stock Exchange, that it has a high growth potential; its success is tied to the application of new technologies or new applications of technologies; and that research and development ("R&D") is a significant component of both its expected value and current expenditure. 

B.    Pre-Commercial vs. Commercial Companies 

Many STCs are often, by nature, young enterprises that show great potential but have yet to commercialise their product or service, or those which have brought their product or service to market but have yet to reach a scale that would satisfy the existing profit, revenue and cash flow requirements under the Main Board Listing Rules. Their expenditures are characterized by a heavy focus on R&D and attracting top talent, but they often have to rely on external funding, including access to capital markets, to support their operations. The growth potential of STCs are tied to the corresponding risk that the relevant product or service might not be successfully and/or sustainably commercialised. In order to mitigate these risks, the Stock Exchange has laid down a set of eligibility criteria that an STC applicant must satisfy to list in Hong Kong.

The Stock Exchange recognizes that among STCs, the risk profiles of STCs that have achieved meaningful commercialisation of their products/services (namely, "Commercial Companies", which are defined as STCs that have at least HK$250 million in revenue in the most recent audited financial year) and those that have not achieved commercialisation (namely, "Pre-Commercial Companies", which are defined as STCs that have not met the revenue threshold) are different.  As such, the eligibility criteria laid down for Commercial Companies and Pre-Commercial Companies are correspondingly different, as summarized below. 

C.    Eligibility requirements 

Sophisticated Independent Investors ("SIIs")

SIIs refer to third party investors that are independent and sophisticated. To be independent they must not be core connected persons, controlling shareholders or the founders or their close associates.  Sophistication is assessed on a case-by-case basis, but the Stock Exchange has suggested, by way illustration, that an asset manager or diversified corporation with significant AUM or assets, or a significant market participant in a relevant upstream/downstream industry, would be considered sophisticated.  

Given the difficulties in valuing STCs, the investment of SIIs is taken as an endorsement and proxy for the quality and financial viability of a given STC. Depending on whether an STC is a Commercial or Pre-Commercial Company, the equity stake of all SIIs is expected to take in the STC is also different in reflection of their respective risk profiles, as summarized below. 

Among the SIIs, a group of two to five SIIs, known as "Pathfinder SIIs", must also have made a meaningful investment into the STC in the 12 months before the date of the listing application. Specifically, the Pathfinder SIIs in aggregate must: 

1. hold such amount of shares (or securities convertible into shares) equivalent to 10% or more of the issued share capital of the listing applicant as at the date of its listing application and throughout the pre-application 12-month period; or 
2. have otherwise invested an aggregate sum of at least HK$1.5 billion in the shares (or securities convertible into shares) of the applicant at least 12 months prior to the date of the listing application (excluding any subsequent divestments made on or before the date of the listing application).

In addition, at least two of the Pathfinder SIIs must each:  

1. hold such amount of shares (or securities convertible into shares) equivalent to 3% or more of the issued share capital of the listing applicant as at the date of its listing application and throughout the pre-application 12-month period; or 
2. have otherwise invested at least HK$450 million in the shares (or securities convertible into shares of the applicant) at least 12 months prior to the date of the listing application (excluding any subsequent divestments made on or before the date of the listing application).

After listing, a Pre-Commercial Company must refrain from effecting any transaction that would result in a fundamental change to their principal business without the advance approval of the Stock Exchange. After a Pre-Commercial Company achieves (i) the "commercialisation revenue threshold" of earning revenues in excess of HK$250 million for the latest audited financial year or (ii) one of the Main Board Listing Rule 8.05 financial eligibility tests, it may apply to the Stock Exchange to remove its designation as a Pre-Commercial Company. 

Thoughts and Observations

The STC Regime is an exciting milestone in developing Hong Kong as a premier listing venue for new technology companies. It is also a natural response to the impressive speeds at which new technology have been developed and put to market in recent years, and the relative flexibility of other major bourses in accommodating the flotation of such new technology firms. 

At the same time, the STC Regime represents a surprising and momentous change from the approach the Stock Exchange has historically taken. In the past, exceptions and carve-outs to the usual Chapter 8 listing regime for specific industries were made incrementally, specifically, and preceded by consultations conducted with stakeholders: Chapter 18 of the Main Board Listing Rules catered for mineral companies in particular, and Chapter 18A, which was introduced in April 2018 after a period of consultation, was designed for biotech companies only. 

The STC Regime inherits a lot of its concepts and eligibility criteria from Chapter 18A and comes across as an extension of the biotech listing regime. But because it can be difficult to anticipate the types of new technologies that will come in the future, the STC Regime is designed as a flexible and open-ended "one stop shop" regime: beyond the current list of specialist technology industries and acceptable sectors set out in the STC Guidance Letter, the Stock Exchange may, after consultation with the Securities and Futures Commission, update the list to include new industries and sectors from time to time. 

Future changes to the list of specialist technology industries and acceptable sectors will therefore no longer require further consultation with stakeholders. This marks a quiet but significant departure from the relatively careful, piecemeal approach the Stock Exchange has historically taken with carve-outs from the usual listing regime. The STC Regime gives the Stock Exchange the speed and nimbleness required to adapt to the rapidly changing technological and economic environment and remain globally competitive but trades off certain procedural safeguards.

It also raises questions about the disparity in treatment between biotech companies under Chapter 18A and other new technology companies. Under the STC Guidance Letter, a "biotech company" relying on a "regulated product" as the basis of its listing application must not attempt to submit an application under the STC Regime. A biotech company that does not satisfy the requirements under Chapter 18A cannot submit an application under the STC Regime in the alternative. But the differentiated treatment between STCs and biotech companies appears more to be a consequence of the order in which the relevant technologies (and the Stock Exchange's corresponding regulations) developed historically. A reason given now for the difference in treatment between biotech companies and STCs is that the former is subject to "Competent Authority" regimes that set external milestones on the development progress of their core products through three-phase clinical trial processes. There is however no absolute reason to think that the industries and sectors listed out in the STC Guidance Letter would not in the future be subject to the supervision and regulation of comparable authorities and be subject to comparable trial and testing regimes. It would be an open question whether those specific regulatory milestones would become a codified eligibility requirement to listing under the STC Regime. There are also certain considerable disparities in the financial requirements between Chapter 18A and the STC Regime. 

Given the broadness of the STC Regime and the differences between the STC Regime and the Chapter 18A Regime, it is not beyond imagination that listing applicants might restructure and cherry-pick their products, services and business lines to qualify for their "preferred" listing regime which they find most easy to satisfy, even if it might not, on the whole, be the most appropriate from a regulatory and/or investor protection perspective.