Pre-revenue Specialist Technology Companies May Soon List in Hong Kong

In an effort to close the gap with the U.S. and Mainland China in terms of the number and market capitalization of publicly listed companies in certain advanced or new technology industries, on October 19, 2022, the Hong Kong Stock Exchange (the “Exchange”) published a consultation paper on a proposed new listing regime for specialist technology companies. The proposed regime will relax certain eligibility requirements and offer greater listing opportunities for specialist technology companies that are unable to meet the Exchange’s current profit, revenue, or cash flow requirements for a Main Board listing.

Proposed Specialist Technology Industries and Sectors

The proposed rules will be set forth under Chapter 18C of the Exchange’s Main Board Listing Rules and apply to only “specialist technology companies,” being companies primarily engaged in the research and development of, and the commercialization and/or sale of, a product and/or service that applies science and/or technology within an acceptable sector of a specialist technology industry.

The initial five acceptable specialist technology industries are:

1. Next-generation information technology, including: (i) cloud-based services (e.g., SaaS, PaaS, and IaaS), and (ii) artificial intelligence (e.g., technology and infrastructure enabling AI, AI-empowered algorithm programming, and AI solutions)
   
   
2. Advanced hardware, including: (i) robotics and automation (e.g., robot technology, IoT technology, smart home applications, and smart product designs), (ii) semiconductors, (iii) advanced communication technology (e.g., 5G and beyond technology and satellite communications), (iv) electric and autonomous vehicles, (v) advanced transportation technology, (vi) aerospace technology, (vii) advanced manufacturing (e.g., additive manufacturing and digitalized manufacturing), (viii) quantum computing, and (ix) metaverse technology
   
   
3. Advanced materials, including: (i) synthetic biological materials, (ii) smart glass technology, and (iii) nanomaterials
   
   
4. New energy and environmental protection, including: (i) new, clean, or renewable energy generation, (ii) new energy storage and transmission technology, and (iii) new green technology
   
   
5. New food and agriculture technologies, including: (i) new food technology (e.g., artificial meat, sustainable protein technology, synthetic biology, and food waste reduction technology), and (ii) new agriculture technology

The Exchange may, after consultation with and approval from the Securities and Futures Commission, update the list of acceptable specialist technology industries and sectors from time to time, taking into account the following principles:

1. Participants in the relevant sector have high growth potential
   
   
2. Their success can be demonstrated to be attributable to the application, to their core business, of new technologies and/or the application of specialist technology to a new business model, which also serves to differentiate them from traditional market participants serving similar consumers or end users
   
   
3. R&D significantly contributes to their expected value and constitutes a major activity and expense

The Exchange will have the discretion to reject a listing application from a specialist technology company if it displays attributes inconsistent with the above principles.

Interestingly, under the proposed listing regime for specialist technology companies, biotech companies relying on a regulated product as the basis of their listing application should continue to follow the requirements under Chapter 18A (Biotech Companies) instead of Chapter 18C of the Listing Rules. Medical technology companies developing medical robotics, nanomaterials, or synthetic biological materials that are not required to be regulated may nevertheless benefit from the proposed regime for specialist technology companies. Such companies interested in seeking a listing in Hong Kong should pay close attention to the consultation conclusion for the proposed new listing regime.

Key Proposed Eligibility Requirements

The Exchange will classify specialist technology companies into two categories: (i) commercial companies that have revenue of at least HK$250 million (approx. US$31.9 million) for the most recent audited financial year, and (ii) pre-commercial companies that have not yet achieved the revenue threshold. The list below sets out the key proposed eligibility requirements:

• Revenue: for commercial companies, at least HK$250 million generated from the specialist technology business segments for the most recent audited financial year; while pre-commercial companies only need to demonstrate a credible path to achieving the minimum HK$250 million revenue threshold

• Market capitalization expected at listing: for commercial companies, at least HK$8 billion (approx. US$1 billion); while for pre-commercial companies, at least HK$15 billion (approx. US$1.9 billion)

• R&D: for commercial companies, (i) they must be engaged in R&D of the specialist technology product or service for at least three financial years before listing; and (ii) their R&D investment must constitute at least 15% of total operating expenditure for each of the three financial years before listing; while for pre-commercial companies, the same applies but R&D investment must constitute at least 50% of total operating expenditure

• Working capital: no enhanced requirement for commercial companies; in contrast, pre-commercial companies must have sufficient working capital (after taking into account the expected IPO proceeds) to cover at least 125% of costs for at least 12 months from the listing document date

• Operational track record: both commercial and pre-commercial companies must have operated in their current line of business under substantially the same management team for at least three financial years prior to listing

• Meaningful third-party investment: for both commercial and pre-commercial companies, (i) there must be at least two sophisticated independent investors investing at least 12 months before the listing application, each holding shares or securities convertible into 5% or more of the issued share capital of the applicant at the time of listing application and throughout the 12-month period before the listing application; and (ii) the aggregate investment from all sophisticated independent investors (from both before and in the IPO) should result in them holding a minimum percentage of the issued share capital of the applicant at listing of, for commercial companies, between 10% to 20%, and for pre-commercial companies, between 15% to 25% — percentages vary depending on the expected market capitalization at listing.

Conclusion

The proposed listing regime is expected to attract more innovative technology companies operating in the five specialist technology industries, including pre-revenue companies, to list on the Exchange. Additional rules on eligibility, price discovery, offering requirements, disclosure, post-listing lock-up, and ongoing obligations for specialist technology companies are also being consulted on. The consultation period will end on December 18, 2022.