HKEx: New guidance on IPO vetting and suitability for listing

On 3 June 2016, HKEx issued a guidance letter (GL68-13A) on initial public offering (IPO) vetting and suitability for listing.

The Exchange noted that there have been a number of newly listed issuers where their controlling shareholders either changed or have gradually sold down their interests shortly after the regulatory lock-up period following listing. One explanation for this phenomenon is the perceived value attached to listing status of these companies rather than the development of the underlying business. The Exchange believes these companies will invite speculative trading which is not in the interest of the investing public. In connection with the above observation, the Exchange has concerns regarding the underlying initiatives of such listing applications, and consequentially the suitability of such listings.

The Exchange has reviewed all new listings between 2012 and 2014 together with selected companies in 2015, and it was noted these companies usually share one or more of the following characteristics – (i) small market capitalisation; (ii) marginally satisfied the listing requirements; (iii) unjustified fund raising where large amount of IPO proceeds were used to pay listing expenses; (iv) pure trading business with high concentration of customers; (v) asset-light business model; (vi) superficial delineation of business from parent company; and/or (vii) little or no external funding at the pre-listing stage.

As a result, the Exchange plans to take a more focused review when a listing applicant has certain characteristics identified above. Such applicant and its sponsors shall provide a robust analysis in the following areas to substantiate that such applicant is suitable for listing: (i) specific disclosures on use of proceeds commensurate with the applicant’s past and future business strategy and the commercial rationale for listing; (ii) detail strategic plan for business operations and growth; (iii) a comprehensive analysis on the applicant’s business sustainability if it showed decreasing trend of revenue/profit; and (iv) demonstration on the applicant’s ability to modify its business if it is operating in “sunset industries”. Based on the results of its review of the analysis, the Exchange may impose additional requirements or conditions or exercise its discretion to reject the applicant's listing on the grounds of suitability.

HKEx will continue to monitor the market and take action when changes are needed due to new developments in the market.

The guidance letter can be found on the HKEx website.