Hong Kong Exchange HKEX plans to examine companies’ reasons for an IPO

The Stock Exchange of Hong Kong Limited (the Exchange), a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEX), has issued a guidance letter (GL) on initial public offering (IPO) vetting and suitability for listing.

The Exchange has noted that there have been a number of newly listed issuers’ controlling shareholders which either sold, or gradually sold down, their interests shortly after the post-listing regulatory lock-up period – sometimes, combined with changes to management and/or the nature of the listed business.

The HKEX’s explanation for this phenomenon is the perceived value attached to listing status by the original controlling shareholder of the newly listing company, as opposed to a genuine need for fund raising, and a listing status, to develop its business. The Exchange believes these companies will invite speculative trading which is not in the interest of the investing public.

According to David Graham, HKEX’s Chief Regulatory Officer and Head of Listing:

To maintain the quality and reputation of the Hong Kong market, the Exchange will take a proactive stance where there are questions about listing applicants’ reasons and justification for listing. In addition, we are continuing to explore ways in which our reverse takeovers and cash company rules can be tightened post-listing.

The Exchange considers that suitability is an important criterion for a company pursuing an IPO.  As a result, the HKEX plans to take a more focused review when a listing applicant has certain characteristics identified. For such applicants, the Exchange will require the applicant and its sponsors to provide a robust analysis to substantiate that the applicant is suitable for listing.

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.

“We will continue to monitor the market and take action when changes are needed due to new developments in the market,” Mr Graham added.

The guidance letter can be found on the HKEX website.

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