On 26 September 2023, the Stock Exchange of Hong Kong Limited (the “Exchange“)  published a consultation paper proposing GEM listing reforms (the “Consultation Paper“). The consultation window is open for six weeks and the deadline for submitting respondence is 6 November 2023. The new Listing Rules are expected to take effect in early 2024.

The proposals aim to encourage more companies to list on GEM whilst maintaining high standards of investor protection.

Key proposals include re-introduction of a streamlined transfer mechanism for eligible GEM issuers to transfer to the Main Board, the introduction of a new alternative eligibility test for companies in the high-growth segment, and removal of mandatory quarterly reporting requirements.

If the proposals under the Consultation Paper are to be adopted, it will be the first major reform of GEM listing in the recent years.

Key Proposals:

I. Initial Listing Requirements

• The Exchange proposes to introduce an alternative financial eligibility test (the “market capitalisation / revenue / R&D test“) to target high growth enterprises that are heavily engaged in research and development (the “R&D“) activities.
• GEM listing applicants using this new test are required to have:

(a) an adequate trading record of at least two financial years (which is consistent with the existing requirements);

(b) an expected market capitalisation of at least HK$250 million at the time of listing;

(c) revenue of at least HK$100 million in aggregate for the two most recent audited financial years, with year-on-year growth over the two financial years; and

(d) incurred R&D expenditure of at least HK$30 million in aggregate for the two financial years prior to listing, where the R&D expenditure incurred for each financial year must be at least 15% of its total operating expenditure for the same period.

• The existing one-year ownership continuity and two-year management continuity requirements will continue to apply under this new test.
• The Exchange also proposes to reduce the post-IPO 24 month lock-up period imposed on controlling shareholders of GEM issuers to 12 months.

II. Continuing Obligations

A. Compliance Officer and Compliance Adviser

• The Exchange proposes to:

(a) remove the existing requirements for one of the executive directors of a GEM issuer to assume responsibility for acting as the issuer’s compliance officer;

(b) shorten the period of engagement of the compliance adviser of a GEM issuer so that it ends on the date on which the issuer publishes its financial results for the first (instead of the second) full financial year commencing after the date of its initial listing; and

(c) remove GEM requirements (to align with Main Board requirements) in relation to a compliance adviser’s responsibilities with regards to:

(i) due diligence on listing documents published, and dealing with the Exchange, in relation to certain transactions during the period of its engagement of the compliance adviser; and

(ii) disclosure of interests of the compliance adviser for such purpose.

B. Periodic Reporting Requirements

• The Exchange proposes to remove quarterly reporting as a mandatory requirement (changing such a requirement into a recommended best practice) for GEM issuers (to align with Main Board requirements).

III. Transfers to the Main Board

• Qualified GEM issuers (those that meet all the qualifications for listing on the Main Board) will be able to transfer their listings to the Main Board without the need to:

(a) appoint a sponsor to carry out due diligence; or

(b) produce a “prospectus-standard” listing document.

• A transfer applicant must:

(a) meet all the qualifications for listing on the Main Board;

(b) have published financial results for three full financial years as a GEM issuer with ownership continuity and control and no fundamental change in its principal business;

(c) meet:

(i) a daily turnover test – a streamlined transfer applicant must have reached a prescribed minimum daily turnover threshold on at least 50% of the trading days over a prescribed reference period of 250 trading days before the transfer application and until the commencement of dealings on the Main Board (the “Reference Period“);

(ii) a volume weighted average market capitalisation test – a streamlined transfer applicant must have a volume weighted average market capitalisation over the Reference Period that could meet the minimum market capitalisation requirement for Main Board listing; and

(iii) a clean compliance record requirement (i.e. not have been held to have committed a serious breach of any Listing Rules and not be subject to any investigation by the Exchange in relation to a serious breach of any Listing Rules) over the 12 months preceding the transfer application and until the commencement of dealings on the Main Board.

• The Exchange proposes to exempt GEM transferees the Main Board initial listing fee.
• A GEM issuer which is not qualified for a streamlined transfer would be required to appoint a sponsor to conduct due diligence and publish a “prospectus-standard” listing document for its transfer.