New listing rules boost pace of Hong Kong’s IPO revival

Hong Kong’s drive to recapture its global status as a top venue for fundraising gained momentum in the second quarter of the year with the Hong Kong Exchanges and Clearing (HKEX) reporting a total of 18 initial public offerings (IPOs)since April, which raised a combined HKD8.7 billion (USD1.1 billion).

Hong Kong was the global top venue for IPOs seven times between 2009 and 2019, but it dropped to the tenth worldwide in the first quarter, reporting only the five deals in January with a total value of HKD2.18 billion. This was followed by a flat February.

But according to HKEX chief executive officer Bonnie Chan Yi-ting, some 70 new IPO applications have been submitted this year, 46% higher than the second half of last year.

Increased capital market cooperation with Mainland

A major turning point was the announcement by the China Securities Regulatory Commission (CSRC) on 19 April of measures to support qualified industry leaders to raise funds in Hong Kong. The CSRC said it would expand the scope of eligible exchange-traded funds (ETFs) under the Stock Connect cross-border investment scheme and include real estate investment trusts (REITs) and yuan-denominated stocks listed in Hong Kong.

New IPO applications surged following the announcement, with 19 submissions in May alone, compared with 10 a month earlier, according to HKEX data.

“We are vetting about 110 listing applications, many of them coming in the second quarter,” Chan told the South China Morning Post. “The pipeline is very healthy.”

Around 80% of the shares that change hands daily in Hong Kong belong to companies based in mainland China. Chan described this close connection with the world’s second-largest economy as the HKEX’s “trump card” and “something that works”, compared with other global exchanges.

“We will continue to build on our China strength,” she said. “It is essentially a very targeted focus in terms of building the ecosystem, which involves three main elements – issuers, investors and products. Once you have built a very robust ecosystem, then the vibrancy will be enhanced, and then the liquidity will come.”

Most notable was the successful listing in June by QuantumPharm, an unprofitable start-up that uses artificial intelligence and quantum physics in developing pharmaceuticals. This was the first listing under the exchange’s Chapter 18C framework, which allows technology pioneers in strategic fields to raise capital even before they meet revenue and profit targets.

“The significance of that is huge because we are opening a totally new channel for pre-revenue companies engaging in the technology intensive areas to seek public funding,” said Chan. “We want to make sure that we continue to create listing frameworks” that offer bespoke fundraising rules to attract companies.”

Pre-IPO wealth planning

“The growing number of IPO applications to list on the HKEX is testament to Hong Kong’s effectiveness as a place for businesses to raise capital and attract investors,” said Sovereign Trust (HK) Managing Director Alan Fong. “This is a further indication that the capital markets are recovering and that there is increasing confidence in the local economy in general.”

The wealth and liquidity created during the IPO process obliges business owners to make some of the most important financial decisions of their lives. A key challenge is how best to manage the wealth generated from the business and to transition it to subsequent generations.

“It is critical to establish an estate plan early in the pre-IPO planning phase because the opportunities will generally diminish as a deal moves toward the closing date,” said Fong. “One key decision is whether to place the equity into a trust prior to an IPO (commonly known as a pre-IPO trust) when it still has only nominal value.”

“If a suitable trust is used as part of the holding structure, it allows the entrepreneur to retain control and stewardship of the company while minimising the commercial and emotional frictions that can arise before and after an IPO,” he added.

A trust provides an important mechanism to limit the risks attached to the business owner’s shareholding in the company to be listed by protecting the IPO process from any possible adverse event to the business owner – divorce, incapacity or death – and can therefore assist in reducing the risk of fluctuations in the price of shares.

“Following a successful IPO, the IPO trust can then provide important family asset arrangements for major shareholders,” said Fong. “If the listed company’s shares are in the hands of a trustee, it offers the potential for lifetime wealth planning, streamlined succession planning and the avoidance of probate, and enhanced asset protection and privacy.”

For further information or for assistance with pre-IPO planning, please contact Alan Fong by phone on +852 2542 1177 or by email below.