Key points of Chapter 18
Chapter 18C provides comprehensive provisions on listing requirements, pricing and post-listing compliance obligations for issuers in the specialist high-technology sector. The key points of Chapter 18C include the following:
Basic conditions to be met by listing applicants
Compared to a general listing applicant, a Chapter 18C listing applicant needs to meet the following conditions:
Additional conditions for listing applicants
An applicant applying for listing under Chapter 18C must:
1) have engaged in the research and development of its specialist technology product(s) for at least three financial years prior to listing;
2) have incurred expenditure on the research and development of its specialist technology product(s) that amounted to:
(a) for a commercial company, at least 15% of its total operating expenditure;
(b) for a pre-commercial company with revenue of at least HK$150,000,000 but less than HK$250,000,000 for its most recent audited financial year, at least 30% of its total operating expenditure; and
(c) for a pre-commercial company with revenue of less than HK$150,000,000 for its most recent audited financial year, at least 50% of its total operating expenditure;
on a yearly basis for at least two of the 3 financial years prior to listing and on an aggregate basis over all 3 financial years prior to listing; and
3) have received meaningful investment from sophisticated independent investors.
In case the Exchange has permitted a shorter trading period, the research and development engagement period will be the same as the permitted shorter trading record period and the research and development costs percentage threshold has to be met on a yearly basis for each of the most recent 2 financial years prior to its listing.
Additional conditions for pre-commercial companies
1) A pre-commercial company must demonstrate to the Exchange and disclose in its listing document a credible path to the commercialisation of its specialist technology product(s) that will result in it achieving the revenue requirement of a commercial company.
2) A pre-commercial company must ensure that it has available sufficient working capital to cover at least 125% of its group’s costs for at least 12 months from the date of publication of its listing document. These costs mainly consist of general, administrative and operating costs and research and development costs and a substantial part of the use of proceeds raised in the initial public offering is expected by the Exchange to cover these costs.
Optimization of the pricing process for initial public offerings
At least 50% of the total number of shares offered in the initial public offering of a specialist technology company must be taken up by independent price setting investors in the placing tranche. Where an initial public offering of a specialist technology company includes both a placing tranche and a public subscription tranche, the minimum allocation of shares to the public subscription tranche shall be as follows:
1) an initial allocation of 5% of the shares offered in the initial public offering;
2) a clawback mechanism that increases the number of shares to 10% when the total demand for shares in the subscription tranche is 10 times or more the initial allocation; and
3) a clawback mechanism that increases the number of shares to 20% when the total demand for shares in the subscription tranche is 50 times or more the initial allocation.
Further, a portion of the total number of its issued shares listed on the Exchange with a market capitalisation of at least HK$600,000,000 are not subject to any disposal restrictions.
Main continuing obligations after listing
The main continuing obligations of a specialist technology company after listing are as follows:
1) Its controlling shareholder(s), founder(s) (including founding members of key operating subsidiaries), beneficiaries of weighted voting rights, executive directors and senior management and key personnel responsible for technical operations and/or research and development shall be subject to a 12 month (for those of a commercial company) and 24 month (for those of a pre-commercial company) lock-up of shares after the listing and existing investors shall be subject to a 6 months (for those of a commercial company) and 12 months (for those of a pre-commercial company) lock up of shares after the listing.
2) A pre-commercial company must include in its interim (half-yearly) and annual reports details of its research and development and commercialisation activities during the period under review, including details of the development progress of its specialist technology product(s) under development and a summary of expenditure on its research and development activities.
3) Where the Exchange considers that a pre-commercial company listed under Chapter 18C fails to comply with rule 13.24 (sufficient operations), the Exchange may suspend dealings or cancel the listing of its securities. The Exchange may also give the relevant issuer a period of not more than 12 months to re-comply with rule 13.24. If the relevant issuer fails to re-comply with rule 13.24 within such period, the Exchange will cancel the listing.
The current release of Chapter 18C by the Exchange will facilitate the listing of specialist technology companies in Hong Kong. This will not only further drive the development of the equity capital market, but will also provide new development opportunities for high-tech companies that have been booming in recent years.
Client Alert 2023-080