The Stock Exchange of Hong Kong Limited (“Exchange”) has recently published a Consultation Paper on the proposed new listing regime for Specialist Technology Companies on the Main Board by introducing a new Chapter 18C. The consultation period will end on December 18, 2022.
What Are Specialist Technology Companies?
A Specialist Technology Company is a company primarily engaged (whether directly or through its subsidiaries) in the research and development of, and the commercialization and/or sales of, products and/or services (alone or with other products or services) that apply science and/or technology within an acceptable sector of a Specialist Technology Industry. The initial list of Specialist Technology Industries proposed by the Exchange is as follows:
Specialist Technology Industry
Next-generation information technology
- Cloud-based services
- Artificial intelligence
- Robotics and automation
- Advanced communication technology
- Electric and autonomous vehicles
- Advanced transportation technology
- Aerospace technology
- Advanced manufacturing
- Quantum computing
- Metaverse technology
- Synthetic biological materials
- Smart glass
New energy and environmental protection
- New energy generation
- New energy storage and transmission technology
- New green technology
New food and agriculture technologies
- New food technology
- New agriculture technology
Specialist Technology Companies will be divided into Commercial Companies (those that have achieved meaningful commercialization of their specialist technology products as indicated by their revenue achieving a minimum threshold) and Pre-Commercial Companies (those that are primarily engaged in R&D to bring their specialist technology products to commercialization or have not yet achieved the minimum revenue threshold).
Key Proposals for the New Listing Regime:
Qualifications for Listing
- Revenue threshold – Commercial Companies are defined as those that have at least HK$250 million revenue arising from their specialist technology business segment for the most recent audited financial year. No such requirement applies to Pre-Commercial Companies, but they must have a higher expected market capitalization.
- Minimum expected market capitalization at listing – HK$8 billion (Commercial Companies) and HK$15 billion (Pre-Commercial Companies).
- Research and development – All applicants must have been engaged in research and development to develop their Specialist Technology Product(s) for at least three financial years prior to listing, with R&D investment amounting to at least 15% of total operating expenditure for Commercial Companies and 50% for Pre-Commercial Companies for each of the three financial years.
- Minimum operational track record – All applicants must have been in operation in their current line of business for at least three financial years prior to listing.
- Management and ownership continuity – Management continuity for three financial years up to listing and ownership continuity and control for the most recent audited financial year up to listing.
- Third-party investment – All applicants must have received meaningful investment from sophisticated independent investors, meaning:
- at least two Pathfinder Sophisticated Independent Investors having invested at least 12 months prior to listing application and each holding shares or share equivalents to at least 5% of the issued share capital as at the listing application date and throughout the pre-application 12-month period; and
- minimum aggregate investment (including any subscription at the IPO) from all Sophisticated Independent Investors as a percentage of issued share capital of the applicant at the time of listing ranging from 10% to 20% (Commercial Companies) or 15% to 25% (Pre-Commercial Companies), depending on the applicant’s expected market capitalization at listing.
- Working capital requirement – Pre-Commerical Companies should have available working capital (including IPO proceeds) to cover at least 125% of the costs for at least 12 months from listing, which must substantially consist of general, administrative, and operating costs and R&D costs). No such requirement applies to Commercial Companies.
- Initial allocation and clawback mechanism – Initial allocation of 5% to the public tranche and clawback of 10% if the public tranche is 10 to 50 times oversubscribed and of 20% if the public tranche is over 50% subscribed. At least 50% of the total shares offered in the IPO (excluding the over-allotment option) must be placed to Independent Institutional Investors (meaning Institutional Professional Investors, whether as cornerstone investor or otherwise but excluding existing shareholders or any of their close associates, and core connected persons).
- Free float – At least HK$600 million upon listing. Free float means shares that are free from any lock-up (whether under law, rules, contract, or otherwise). The public float (generally at least 25% of the total issued share capital to be held by the public) remains unchanged.
- Offering size – The Exchange retains discretion regarding the offer size. If the offer size is not meaningful or significant enough to facilitate post-listing liquidity, the Exchange may not approve the listing.
- Disclosure requirements – Additional disclosures (including but not limited to) on pre-IPO investments and cash flows, products and commercialization status and prospects, industry-specific information, intellectual property, and appropriate warning statements. Pre-Commercial Companies should also disclose the key stages and milestones for achieving the commercialization revenue threshold (being HK$250 million for the most recent audited financial year arising from the specialist technology segment).
- Lock-ups – Generally, controlling shareholders, key persons (including founders, WVR beneficiaries, executive directors and senior management, and key personnel responsible for the technical operations and R&D of the Specialist Technology Products) are subject to a 12-month lock-up (for Commercial Companies) or a 24-month lock-up (for Pre-Commercial Companies). Pathfinder Sophisticated Independent Investors are subject to a six-month lock-up (for Commercial Companies) and a 12-month lock-up (for Pre-Commercial Companies).
We have prepared the following Q&A based on some questions which we have received from market participants:
- Q1: Can a company that falls outside of the list of Specialist Technology Industries and acceptable sectors but that nonetheless meets all the other qualification requirements apply for listing under the proposed regime?
A: The list of Specialist Technology Industries and acceptable sectors is non-exhaustive in nature. The Exchange will update the list from time to time, taking into account the following principles: (i) participants in the relevant sector have high growth potential, (ii) the success of participants in the sector is attributable to the application, to their core business, of new technologies and/or application of the relevant science/technology within that sector to a new business model, differentiating them from traditional market participants, and (iii) R&D significantly contributes to the expected value, and is a major activity and expense of participants in the sector. A listing applicant may submit a pre-A1 consultation to the Exchange. The Exchange may add to the list after consultation with and approval from SFC.
- Q2: Can a Biotech Company relying on a Regulated Product (as defined in Chapter 18A of the Listing Rules) submit its listing application under this proposed regime?
A: No. The Biotech Company must submit its listing application under Chapter 18A of the Listing Rules, and is not permitted to submit its application under the proposed regime even if the Biotech Company meets all the other qualification requirements. This is because the Competent Authority regime, which provides independent third-party validation of the applicant’s core product, is absent under the proposed regime.
- Q3: Can a traditional company that has transitioned or expanded into one of the Specialist Technology Industries apply for listing under the proposed regime?
A: Yes. The application will have to demonstrate that the company is primarily engaged in the relevant Specialist Technology Industry. The Exchange will take into account the following:
- Financial and senior management resources – Whether a substantial portion of the total operating expenditure of the listing applicant and senior management resources was dedicated to R&D, commercialization, and/or sales of the Specialist Technology Product(s) in the Specialist Technology business segment(s) for at least three financial years prior to listing;
- Contribution to valuation – Whether investors’ valuation and the expected market capitalization of the listing applicant are based primarily on the Specialist Technology business segment(s); and
- Use of proceeds– Whether the IPO proceeds will primarily be applied to the Specialist Technology business segment.
Morrison Foerster is a leading international technology firm in China and has been ranked as a top firm for TMT in China by Chambers Asia Pacific and The Legal 500 Asia Pacific. Our Artificial Intelligence + Robotics (“AI/R”) Group serves companies that are creating, deploying, and investing in AI, machine learning, deep learning, and robotics. The team includes corporate and commercial lawyers who are skilled in leading deals at the intersection of computer tech and human-like intelligence. In the past decade, the AI/R team has handled more than 60 corporate and M&A transactions and commercial contract agreements involving AI, AI-enabled systems and applications, autonomous vehicles, big data, drones and other unmanned aircraft systems, machine learning, and robotics, with transaction value generally ranging from US$80 million to more than US$1.2 billion. In recent years, we represented SoftBank in its acquisition of robotics companies Boston Dynamics, Inc. from seller Alphabet Inc. and then its disposal to Hyundai Motor Group. MoFo also has a leading Hong Kong equity capital markets practice, which also has been widely recognized by Chambers Asia Pacific, The Legal 500, and IFLR.
If you have any questions, please feel free to directly contact MoFo partners Vivian Yiu, Ke Huang, and Chuan Sun.