Hong Kong has for some time been the preeminent centre for Initial Public Offerings (IPOs) worldwide. But with the city facing rising competition form New York, Shanghai, London and Singapore and in the absence of blockbuster listings in 2017, Hong Kong lost its spot as the world’s top IPO fundraising venue. Alibaba’s choice of New York over Hong Kong for its US$25 billion share offer in 2014 should probably have been the wake-up call.
In response, the Hong Kong Stock Exchange (HKSE) announced in mid-December the most drastic overhaul of its listing regulations and procedures in three decades in a bid to attract more high-quality, emerging and innovative companies to launch IPOs in the city.
Under the HKSE’s new rules effective in mid-2018, biotech firms need at least HK$1.5 billion (US$20 million approx.) in valuation at the time of their listing, but they need not have any revenue track record to raise funds in the city.
The sector has been chosen as the initial focus because biotech companies in the pre-revenue stage of development make up a majority of companies seeking a listing. Moreover, activities undertaken by biotech companies tend to be strictly regulated under a regime that sets external milestones on development progress. This enables investors to assess the value of these companies in the absence of the traditional indicators of performance.
Companies with multiple classes of shares must be engaged in businesses classified as new economy, with at least HK$10 billion in valuation and annual revenue of at least HK$1 billion. Businesses with valuations exceeding HK$40 billion (US$5.1 billion) can raise funds in Hong Kong with a lower revenue threshold, according to the new rules.
The proposed changes would also allow the listings of technology companies with a valuation of at least HK$10 billion (US$1.28 billion) to involve multiple classes of shares, subject to additional disclosures and safeguards. A dual-class stock structure gives one set of shareholders greater voting rights than others. Many companies in the tech sector have favoured this approach because the extra voting power given to top executives is viewed as protection against pressure for short-term returns.
Hong Kong may already start feeling the positive effects of the overhaul. Shanghai Henlius Biotech Inc., backed by Fosun Group, could be one of the first to take advantage of the new listing rules. The company, which currently has no marketed products, is pursuing a Hong Kong listing to sell shares to raise funds in excess of US$500 million to fund more research as it develops treatments for oncology and autoimmune diseases. Should this deal come through, it may just be the catalyst Hong Kong needs to regain the competitive advantage.
For those who intend to capitalise on the new listing regime in Hong Kong, it is important to remember that taking a company public is a key moment for any business. While it is important to focus on the corporate components of the transaction, the principals involved are well advised to create a structure beforehand that can accommodate the future interests of their business and family alike.
The use of trusts in pre-IPO and post-IPO planning can offer significant benefits in terms of risk management, ownership and control, as well as retaining and incentivising key employees. Sovereign’s team is highly experienced at helping clients around the world set up trusts for their businesses and families, as well as providing the legal and tax advice that is required to optimise the benefits.
