Brief history of IPOs in Hong Kong
• The Stock Exchange of Hong Kong Limited (the “SEHK”) was incorporated in 1980, unifying the then four exchanges in Hong Kong.1
• In July 1993, the first PRC incorporated enterprise was listed in Hong Kong.2
• In November 1999, the Growth Enterprise Market was established to provide a platform for fund raising for companies with growth potential.
• The SEHK, Hong Kong Futures Exchange Limited and Hong Kong Securities Clearing Company Limited merged and formed a single holding company, Hong Kong Exchanges and Clearing Limited (“HKEx”), the shares of which were listed on the Main Board on 27 June 2000.
• In 2012, HKEx, Shanghai Stock Exchange and Shenzhen Stock Exchange established a joint venture, China Exchanges Services Company Limited, for developing financial products and related services. Shanghai-Hong Kong Stock Connect was launched in November 2014 while Shenzhen-Hong Kong Stock Connect was launched in December 2016, creating access for Mainland investors to securities traded on the SEHK through their domestic brokers.
• The efforts of HKEx and the other relevant market participants have made Hong Kong one of the leading listing venues in the world. From January 2018 to mid December 2018, the IPO equity funds raised at the HKEx amount to approximately US$35,580 million, ranking first in the global listing market.3
• In December 2017, the Growth Enterprise Market was renamed as GEM.4
Reasons for companies to choose to list in Hong Kong
The Hong Kong Government and HKEx endeavour to maintain Hong Kong as an attractive spot to local and foreign companies for fund-raising and listing activities. The following features of the Hong Kong securities market are some of the major reasons for companies to choose to list in Hong Kong:
• Objective listing qualifications: The SEHK adopts a rather objective set of listing qualifications, with very limited policy consideration, giving certainty to the listing process.
• Leading position in the global market: Hong Kong has successfully established itself as an international financial centre and as a leading listing venue in the world. As at 14 December 2018, the market capitalisation of the Main Board and GEM amounted to approximately HK$30,369.8 billion.5
• Well-established legal system:The well-established common law system with the rule of law upheld by an independent judiciary, together with a robust regulatory regime protecting the investors’ interest, afford confidence to the local and foreign issuers as well as investors.
• Strong bonds with China: Hong Kong is a common listing and fundraising venue for PRC companies and international enterprises. Hong Kong serves as a key link for China to connect with the global capital markets. It is also a trusted channel for foreign enterprises to access funds of PRC investors.
• Diversity of investors and issuers: Hong Kong enjoys a balanced mix of institutional and retail investors. This helps to attract issuers from a wide range of industries, including industries of real estates, telecommunications, upstream and downstream manufacturing, retail business, e-commerce, financial services, construction, internet business, education, energy, etc.
• Doors opened for emerging and innovative sectors and weighted voting right structure: In April 2018, HKEx published the Consultation Conclusions to expand the existing listing regime to facilitate the listing of companies from emerging and innovative sectors, subject to appropriate safeguards.6 The HKEx introduced three chapters to the Main Board Listing Rules to: (i) permit listing of biotech companies that do not meet any of the financial eligibility tests; (ii) permit listing of innovative and high growth companies with a weighted voting rights structure; and (iii) establish a concessionary secondary listing route for emerging and innovative Greater China and international companies (known as Qualified Issuers) that are primarily listed on a specified qualified exchange.
Steps and timing of IPOs in Hong Kong
The SEHK adopts a streamlined vetting process for listing application. The listing application submitted to the SEHK must be substantially complete. Depending on the complexity and the scale of the IPO, below is a general timeline for illustrative purposes.
Parties involved in the IPO process in Hong Kong
The following table sets out the main parties involved in the IPO process and the roles they play.
Bilingual prospectus requirement – unique feature of IPOs in Hong Kong
One of the unique features of the SEHK is the requirement of a bilingual prospectus (in English and Chinese).12 Market players in Hong Kong are accustomed to preparing dual-language documentation and conducting bilingual communication with the regulatory authorities. These enable the listing applicant to be closely involved and fully informed throughout the listing process.
Organisations responsible for regulating IPOs in Hong Kong
• The responsibility of overseeing the regulatory regime of the Hong Kong IPO market primarily rests with the SEHK and the SFC.
• In general, the SEHK assumes the role in regulating the market operation. In particular, it is the duty of the SEHK to make sure that the Hong Kong listing market is operated in a fair, orderly and informed manner.13 The aforementioned regulatory functions of the SEHK are shared between the Listing Division and the Listing Committee.
• The SFC, being an independent statutory body, is entrusted with the responsibility to maintain and promote fairness and transparency of the securities and futures industry, to protect public investors and to reduce systemic risks in the securities and futures industry.14 The SFC carries out its functions through the exercise of its statutory powers of investigation and enforcement.
Key rules and regulations applicable to the IPO process in Hong Kong
The major laws and regulations governing the listing process in Hong Kong include the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.
32), the Securities and Futures Ordinance (Cap. 571), and the Listing Rules.
Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.
• A prospectus complying with certain content requirements is required for the offer of shares in a company to the public.15 The prospectus must also be registered with the Registrar of Companies before publication.16
• Section 40 provides that the following persons shall be liable to compensate investors for the loss they have sustained by reason of any untrue statement or a material omission in a prospectus:
• the directors of the company at the time of issue of the prospectus;
• persons who are named in the prospectus as directors or as having agreed to become directors and who have authorised themselves to be so named;
• a promoter of the company; and
• any person who has authorised the issue of the prospectus.
• Section 40A provides that any person who has authorised the issue of a prospectus (e.g.
directors) containing any untrue statement or material omission may be liable to imprisonment and a fine, unless they can prove either that the statement was immaterial or that they had reasonable grounds to believe, and did up to the time of the issue of the prospectus believe, that the statement was true.
Securities and Futures Ordinance (Cap.
• The SFO imposes civil and criminal liabilities for misstatements which induce investment. Section 108(1) provides that a person who makes any fraudulent, reckless or negligent misrepresentation which induces others to deal in securities may be liable for compensation. Section 107 imposes criminal liability for making fraudulent or reckless misrepresentation inducing others to deal in securities, which is punishable by a maximum fine of HK$1 million and up to seven years’ imprisonment.
• By virtue of section 277, it is a market misconduct to disclose false or misleading information, or omit a material fact from the disclosure, which induce securities transactions. Pursuant to section 257(1), the Market Misconduct Tribunal may impose different sanctions for market misconduct, including disqualification order, cold shoulder order, cease and desist order, disgorgement order, costs order, disciplinary referral order, etc. Section 298 imposes criminal liability on the similar circumstances as section 277, which is punishable by a fine of up to HK$10 million and imprisonment for up to 10 years. Any person committing market misconduct may be liable for compensation under Section 305.
• Section 384 imposes criminal liability on any person who intentionally or recklessly provides any information which is false or misleading in a material respect in filing with the SEHK or the SFC a prospectus, other listing document or any public disclosure materials disseminated under the Listing Rules. Copies of applications to list on the SEHK and all ongoing disclosure materials are filed with the SFC through the SEHK under the “dual filing” regime. An offence under section 384 is punishable by up to two years’ imprisonment and a maximum fine of HK$1 million.
• The Listing Rules set out conditions which the listing applicants are expected to meet before securities may be listed in Hong Kong. In addition, the SEHK also issues guidance letters and listing decisions to provide additional guidance on application of the Listing Rules.
Obligations exclusively imposed on public companies in Hong Kong
The Listing Rules require companies listed on the SEHK to comply with a list of continuing obligations. Listed below are some examples of such obligations:
As discussed above, the listing market in Hong Kong is subject to joint regulation by the SEHK and the SFC. Under the current regulatory regime, civil and criminal liabilities may arise during and after the IPO process.
In recent years, the SEHK and SFC have expressed grave concern over the price swings of GEM stocks after listing. In addition, the regulators raised concern about the highly concentrated shareholdings and small shareholder bases of GEM stocks. On 20 January 2017, the SFC issued a guideline to sponsors, underwriters and placing agents involved in the listing and placing of GEM stocks29 and a joint statement with SEHK regarding the price volatility of GEM stocks.30 Subsequent to the issue of the joint statement by the SFC and SEHK, the regulators have taken actions against different GEM listing applicants, in particular those of placing-only GEM listings, delaying their listings. Listing applicants should consult the sponsor and legal advisers on compliance with the guideline and ensure that there will be an open market in the securities for which listing is sought.
1. “History of HKEX and its Market – HKEX Group”– (Hyperlink) About-HKEX/Company-Information/About-HKEX/History-of-HKEX-and-its-Market?
2. HKEx Fact Book 1999 – (Hyperlink).
3. HKEx Market Statistics 2018 – (Hyperlink) News/News-Release/2018/181221news/181221news.pdf?la=en.
4. Consultation Conclusions – The Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules (December 2017) – (Hyperlink).
5. HKEx Market Statistics 2018 – (Hyperlink) News/News-Release/2018/181221news/181221news.pdf?la=en.
Consultation Conclusions – A Listing Regime for Companies from Emerging and Innovative Sectors (April 2018) – (Hyperlink) News/Market-Consultations/2016-Present/February-2018-Emerging-and-Innovative-Sectors/Conclusions-(April-2018)/cp201802cc.pdf.
7. Guidance Letter GL43-12.
8. Rule 9.03(3) of the Main Board Listing Rules and Rule 12.09 of the GEM Listing Rules.
9. Sections 38D and 342C of the Companies (Winding up and Miscellaneous Provisions) Ordinance.
10. Rule 3A.02 of the Main Board Listing Rules and Rule 6A.02 of the GEM Listing Rules.
11. Rule 5.01B(2)(a) of the Main Board Listing Rules and Rule 8.01B(2)(a) of the GEM Listing Rules.
12. Section 38(1) of the Companies (Winding up and Miscellaneous Provisions) Ordinance.
13. “How We Regulate” – (Hyperlink) ?sc_lang=en.
14. “Introduction to Regulatory Framework” – (Hyperlink).
15. Sections 38 and 342 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.
16. Section 38D(1) and 342C(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.
17. Rule 13.09 of the Main Board Listing Rules and 17.10(2) of the GEM Listing Rules.
18. Rule 13.51(2) of the Main Board Listing Rules and Rule 17.50(2) of the GEM Listing Rules.
19. Rules 13.13 and 13.14 of the Main Board Listing Rules and Rules 17.15 and 17.16 of the GEM Listing Rules.
20. Chapter 14 of the Main Board Listing Rules and Chapter 19 of the GEM Listing Rules.
21. Chapter 14A of the Main Board Listing Rules and Chapter 20 of the GEM Listing Rules.
22. Rule 13.46 of the Main Board Listing Rules.
23. Rule 13.48(1) of the Main Board Listing Rules.
24. Rule 18.03 of the GEM Listing Rules.
25. Rules 18.53 and 18.66 of the GEM Listing Rules.
26. Note 1 to Rule 13.91 of the Main Board Listing Rules and Note 1 to Rule 17.103 of the GEM Listing Rules.
27. Rule 13.10 of the Main Board Listing Rules and Rule 17.11 of the GEM Listing Rules.
28. Rule 13.10(2) of the Main Board Listing Rules and Rule 17.11(2) of the GEM Listing Rules.
29. Guideline to sponsors, underwriters and placing agents involved in the listing and placing of GEM stocks – (Hyperlink).
30. Joint statement regarding the price volatility of GEM stocks – (Hyperlink) web/EN/news-and-announcements/policy-statements-and-announcements/joint-statement-regarding-the-price-volatility-of-gem-stocks.html.