September 2019 RESEARCH REPORT INITIAL PUBLIC OFFERING (IPO) AND LISTING PROCESS ON THE SEHK WITH HIGHLIGHTS CONTENTS Page Summary ........................................................................................................................................ 1 1. General requirements for listing in Hong Kong ......................................................................... 2 1.1 Main Board listing conditions ........................................................................................... 2 1.2 Shareholding structures for listing in Hong Kong ............................................................. 3 Jurisdictions acceptable as place of incorporation ............................................... 3 Shareholding structures of Mainland companies seeking to list in Hong Kong ..... 3 Red-chip structure ............................................................................................... 4 Variable Interest Entity (VIE) structure ................................................................. 5 H-share structure ................................................................................................. 6 1.3 Listing of H-shares: An update ........................................................................................ 9 H-share companies have become an important part of the Hong Kong stock market ................................................................................................................. 9 Successful implementation of the H-share full circulation pilot programme ........ 10 Pilot programme for NEEQ companies to list in Hong Kong under the “NEEQ + H shares” model ................................................................................. 11 Closer connection between B and H shares ...................................................... 11 1.4 Listing in Hong Kong: Professional parties involved ...................................................... 11 Sponsors and Compliance Advisers .................................................................. 11 Underwriters ...................................................................................................... 12 Solicitors ............................................................................................................ 12 Accountants ....................................................................................................... 12 1.5 Conditions for a GEM listing .......................................................................................... 13 1.6 Backdoor listing in Hong Kong ...................................................................................... 14 Definition of reverse takeover (RTO) transactions.............................................. 14 Tightening the compliance requirements for RTOs and extreme transactions .... 15 2. Application and vetting process for enterprise listing in Hong Kong ........................................ 15 2.1 Roles and duties of the SEHK and the SFC .................................................................. 15 2.2 Overview of the IPO vetting process ............................................................................. 16 3. Hong Kong listed company regulation and equity refinancing ................................................ 19 3.1 Listed company regulation ............................................................................................ 19 3.2 Equity refinancing of listed companies .......................................................................... 19 Further equity issuance after listing ................................................................... 20 Rights issues ..................................................................................................... 20 Convertible/exchangeable bonds ....................................................................... 20 Equity warrants/options ..................................................................................... 21 Block trades ....................................................................................................... 21 Chief China Economist’s Office and Global Issuer Services Hong Kong Exchanges and Clearing Limited 16 September 2019 Initial public offering (IPO) and listing process on the SEHK with highlights 16 September 2019 SUMMARY This paper presents in a succinct way the initial public offering (IPO) and listing process of enterprises on the Stock Exchange of Hong Kong, i.e. on the securities market operated by the Hong Kong Exchanges and Clearing Limited. Enterprises, in particular Mainland enterprises, seeking a listing in Hong Kong may decide on a choice among various shareholding structures. Apart from the listing requirements of the Main Board and GEM, the paper also introduces the professional services that an enterprise requires in the IPO and listing process, and the ways for equity re-financing after listing. 1 Initial public offering (IPO) and listing process on the SEHK with highlights 16 September 2019 1. GENERAL REQUIREMENTS FOR LISTING IN HONG KONG In general, companies in any business sector seeking a listing on the Main Board of the Stock Exchange of Hong Kong Limited (the “SEHK”, or the “Exchange”)1 shall comply with the set of conditions set out in Chapter 8 of the Rules Governing the Listing of Securities on the Exchange (the “Listing Rules”, or the “Rules”). It should be noted that the Exchange retains an absolute discretion to accept or reject an application for listing and that compliance with the relevant conditions may not of itself ensure an applicant’s suitability for listing. 1.1 Main Board listing conditions The Main Board market in Hong Kong is designed for more established companies with a certain level of market capitalisation/revenue/profit scale. Listed companies range from conglomerates, banks, property developers to Internet companies and healthcare service providers. Companies applying for listing on Main Board shall meet the following basic conditions: (1) Financial requirements (to meet at least one of the following three sets of test) 2 Profit test the profit attributable to shareholders must, in respect of the most recent financial year before listing, be not less than HK$20 million; the profit attributable to shareholders must, in respect of the two preceding years, be in aggregate not less than HK$30 million; and a market capitalisation of at least HK$500 million at the time of listing3. Market capitalisation/revenue test revenue of at least HK$500 million for the most recent financial year before listing; and a market capitalisation of at least HK$4 billion at the time of listing. Market capitalisation/revenue/cash flow test revenue of at least HK$500 million for the most recent financial year before listing; positive cash flow from operating activities that are to be listed of at least HK$100 million in aggregate for the three preceding financial years; and a market capitalisation of at least HK$2 billion at the time of listing. (2) Other requirements Apart from the above financial requirements, companies applying for listing in Hong Kong shall also meet a set of basic requirements in relation to the business history, public float, management and control, including the following: trading record period of at least three financial years (a shorter trading record period may be considered in exceptional cases4); 1 Unless otherwise stated, references in this paper to “listing” means an initial public offering (IPO) and listing on the Main Board of the SEHK. 2 See Listing Rule 8.05. 3 See Listing Rule 8.09(2). 4 See Listing Rule 8.05A. 2 Initial public offering (IPO) and listing process on the SEHK with highlights 16 September 2019 minimum public float (usually 25%, but may be reduced to 15% at discretion if the market capitalisation at the time of listing is more than HK$10 billion); there must be at least 300 shareholders at the time of listing5; no change to the management in the three preceding financial years; no change to the ownership and control of the company in the most recent financial year; there must be at least three independent directors representing at least one-third of the board6; at least one independent non-executive director (INED) must be ordinarily resident in Hong Kong in the case of H-share applicant; at least two of the executive directors must be ordinarily resident in Hong Kong7; a relevant professional be appointed to discharge the functions of a company secretary8; the latest financial period reported on by the reporting accountants must not have ended more than six months before the date of the listing document. 1.2 Shareholding structures for listing in Hong Kong Jurisdictions acceptable as place of incorporation Applicants seeking to list in Hong Kong must first be incorporated in an “acceptable jurisdiction”9 admitted by the Exchange. According to the Listing Rules, companies incorporated in Hong Kong, Mainland China, Cayman Islands and Bermuda are eligible to apply for listing. And as of 30 June 2019, there are 27 other “acceptable jurisdictions” for overseas companies, including England & Wales, the British Virgin Islands, France, Italy, Russia, Japan, Singapore, Australia, etc. Overseas applicants shall demonstrate that the standards of shareholder protection of its place of incorporation are at least equivalent to those provided in Hong Kong, or they may have to vary its constitutive documents to provide an equivalent protection. Shareholding structures of Mainland companies seeking