THE REVIVAL REFORM FOR GEM LISTING

October 2023

The recent GEM Listing Reform Consultation Paper (the “Consultation Paper”) published by the Stock Exchange of Hong Kong Limited purports to revive the dormancy of GEM listing. The usual requirement for the GEM applicants to show a track record of positive operating cash flow renders the listing not viable for those companies engaged in research and development even though they have high growth potential. The quarterly financial reporting requirement also levies high compliance costs. There is minimal incentive to list on GEM board.

The Consultation Paper proposes to reform these areas:

(1) Initial Listing Requirements

The current requirement for a GEM applicant to show a minimum positive operating cash flow of HK$30 million in aggregate for the two financial years prior to listing is to be replaced by a new “market capitalization/revenue/R&D test”. The new eligibility test requires:

• an adequate trading record of at least two financial years;
• an expected market capitalization of at least HK$250 million at the time of listing;
• 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
• incurred research and development expenditure of at least HK$30 million in aggregate for the two financial years prior to listing, where the research and development expenditure incurred for each financial year must be at least 15% of the applicant’s total operating expenditure for the same period.

This test emphasizes the importance of research and development expenditure as a criterion which highlights the focus on promoting innovation within GEM-listed companies.

(2) Reduction of post-IPO lock-up period for controlling shareholders

The current post-IPO lock-up period set at 24 months is to be reduced to 12 months and will be aligned with the same requirements as imposed on Main Board listed companies. This is a welcoming step towards achieving consistency on the Stock Exchange’s two platforms.

(3) Continuing Obligations

To reduce the undue and rigid continuing obligations and to lower compliance costs, it is proposed that:

• the current quarterly reporting requirement be removed and in line with the reporting timing with that of the Main Board; and
• the requirement for one of the executive directors to act as compliance officer be removed and the period of engagement of compliance adviser of the GEM issuer be shortened.

(4) Transfer to the Main Board

To enable a more streamlined mechanism for the transferring to the Main Board, the following is proposed:

• removal of the requirement to appoint a sponsor to carry out due diligence work prior to the transfer;
• removal of the prospectus-standard listing document;
• keeping of a minimum track record of three financial years demonstrating both ownership continuity and control as well as no fundamental change in principal business;
• maintenance of a minimum daily turnover threshold on at least 50% of the 250 trading days immediately preceding the transfer application and until the commencement of dealings on the Main Board; and
• attendance of a volume weighted average market capitalization that meets the minimum market capitalization requirement for listing on the Main Board.

The introduction of performance thresholds, such as the minimum daily turnover and volume-weighted average market capitalization, set up an objective criteria for assessing a company's readiness for transfer.

It is expected that these new proposals (subject to the feedback of consultation) will become effective in early 2024.