Hong Kong’s new IPO listing rules working for innovation startups

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IT, biotech, medtech, healthtech early stage companies find a new friendly listing platform in Asia.

The Hong Kong Stock Exchange (HKEX) has recently reformed its listing regime to welcome companies from emerging and innovative sectors. Last Friday, it issued a guidance letter to address the characteristics of internet-related companies, clearing doubts for tech firms that intend to seek listing in the city and making the listing rules better suit the needs of these companies.

“Over the last few years internet technology firms have become dominant players in many industries. The guidance we are publishing today reflects these changes and provides the flexibility these companies need to list whilst still providing the necessary protections for investors,” says David Graham, HKEX’s Head of Listing.

Better suit the tech firms

According to the HKEX’s guidance last Friday, an applicant may be able to list if it demonstrates that it meets certain conditions, even though there is a high degree of reliance on a parent company, connected person, major suppliers, or major customers.

“The business models of these companies, especially Internet-based companies, at the early stage of their development often extensively use the services offered by the businesses of their parent company, or another connected person, to facilitate their own products or services. For example, a new applicant may promote its products or services using the Internet based social network platform of its parent company,” says the HKEX. It lays the ground for such exception.

In addition, waivers may be granted on a case-by-case basis to allow annual caps on continuing connected transactions to be set as a formula instead of a monetary amount.

The HKEX explains that the companies may have a short operating history or be in a growth phase, so historical revenues would not be reliable for estimating future transaction volume.

Waivers may also be granted to allow a higher percentage cap on outstanding share options to be granted, and a longer than 10 year take-up limit for a share incentive scheme, as these companies often retain and incentivise talented persons in order to develop their businesses through the grant of share options.

And if the relevant laws and regulations applicable to an applicant are still developing and will not be promulgated soon, disclosure of the associated risks would be sufficient.

An ideal market

As the listing rules get clearer and friendlier, Hong Kong could become an ideal listing market for the tech startups, which are in need of funds to carry out research and development (R&D) activities.

“The new listing rules will give companies access to a wider range of investors via the public financial markets. This could be a Nasdaq equivalent in the East,” says Victor Tong, a partner at Chinese healthcare investor Decheng Capital.

“The creation of a new Hong Kong stock exchange tailored for emerging healthcare companies fosters a stronger startup ecosystem in Hong Kong and Greater China,” he says.

In late April, the HKEX added three new chapters to its Main Board Listing Rules for pre-revenue biotech startups and companies with weighted voting rights structures.

Biotech firms also welcome the latest move of the HKEX, saying it will have a positive impact on the industry.

A “U.S. listing is now no longer the only option. This will bring much greater exposure and funding to qualified biotech companies,” says Danny Yeung, CEO of Hong Kong-based biotech startup Prenetics.

“Typically, biotech companies do require a much longer road to commercialisation and this will certainly pave the road forward for qualified companies,” he adds. “In today’s world, every industry is seeking competitive advantages and competition is fierce. This move by the HKEX could be a first step in relaxing some of the profit requirements required for listing in Hong Kong,” says Mr Yeung.

An innovation hub

Coming along with the HKEX’s reform is Chinese president Xi Jinping’s recent pledge to support Hong Kong to become a global innovation hub. On the back of the central government, the city could attract talent for R&D and access government funding more easily.

And now the HKEX has opened an additional channel for tech startups to raise funds to support their R&D activities, creating an ecosystem to incubate innovation.

Rocky Tuan, the new president of The Chinese University of Hong Kong, says capital is the best catalyst for innovation.

“Allowing pre-revenue biotech startups to raise funds through IPOs in Hong Kong is ‘a real shot in the arm’ for the R&D industry,” says Mr Tuan. He hopes there will be more capital channeled into scientific research.

(Printer – R&R Publishing Limited, Suite 705, 7/F, Cheong K. Building, 84-86 Des Voeux Road Central, HK)