(First published on https://www.pwfo.org/blog/listing-in-hong-kong-specialist-technology-companies)

Hong Kong has been promoting entrepreneurship and startups for years.  The two major startup flagships are The Hong Kong Science and Technology Park and Cyberport.  There are currently a few thousand startups in these 2 communities.  Some of them are unicorns.  Numerous pitching events are held each year to award startups with innovative ideas and technological breakthroughs.

Capital raising is important to help startups grow.  This also holds true for startups in China as well as around the globe.  With this, the Hong Kong Stock Exchange Limited (HKEx) has recently amended the Listing Rules to permit technology companies without profits to have a listing in Hong Kong.

These companies must have been in operation for at least 3 financial years and have already been funded by investors to a significant extent.

They are categorized into: Commercial Company or Pre-Commercial Company with different revenue, market capitalization as well as research and development (R&D) requirements.

For Commercial Companies, market capitalization must be at least HK$6,000,000,000 and revenue HK$250,000,000 for the most recent audited financial year. At least 15% of its total operating expenditure must be on R&D.

For Pre-Commercial Companies, market capitalization must be at least HK$10,000,000,000 and in the most recent audited financial year:

1. revenue of at least HK$150,000,000 but less than HK$250,000,000, 30% of its total operating expenditure must be on R&D; and
2. with revenue less than HK$150,000,000, R&D expenditure must be not less than 50% of its total operating expenditure.

These percentages must be met:

1. on a yearly basis for at least 2 of the 3 financial years; and
2. on an aggregate basis over all three financial years

prior to listing.

The Pre-Commercial Companies must illustrate a creditable path of the commercialization of its products to achieve the revenue required of a Commercial Company in its listing documents. It must have sufficient working capital to cover at least 125% of the group’s costs for at least 12 months from the date of publication of its listing documents.  Pre-Commercial Company can apply to HKEX to remove the designation if it fulfills the criteria for a Commercial Company.

A significant amount of the shares must be offered to the general public to subscribe.  The controlling shareholders are subject to a lockdown period of 12 months / 24 months for Commercial Companies and Pre-Commercial Companies respectively.

For listing, founders should:

1. Check with a big audit firm to ascertain if their companies can qualify as Specialist Technology Companies and if the required revenue / market capitalization / R&D expenditures meet with the requirements;
2. Have a good estimate of the costs for initial public offering and annual continuous listing – these include but not limited to the preparation of annual audited financial statements, Environmental, Social and Governance reports, fees payable to the Share Registrar / HKEx / other professionals etc;
3. Line up a sponsor to build a team to includes financiers / lawyers / accountants / share registrar etc to conduct due diligence as well as to prepare the listing documents and to determine the listing time table;
4. Pick the right listing vehicle because HK permits quite a number of jurisdictions to get listing. Founders should consider the most appropriate jurisdiction good for holding all the company assets for legal and tax purposes.
5. Be aware that transfer of shares in HK attracts stamp duty. Current rate is 0.26% normally to be shared between the buyer and seller.  If restructuring of the company assets in Hong Kong is required prior to listing, stamp duty cost should also be estimated and added to the costs of listing.  Conveyancing of real estate is also subject to stamp duty payment.
6. Check if the composition of the board meets with the listing requirements. HKEx requires a diversified board with different skill sets and gender.  There must be at least 1/3 or a minimum of 3 independent non-executive directors, whichever number is higher, to ensure independent views on business transactions and for good governance purpose.  All the board members must be willing to spend sufficient time in ensuring the internal control and governance standards are up to par as required by HKEx.  Directors must attend training on an annual basis to stay on top of the knowledge and practice expected of them.

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