Going east - Accessing capital in Hong Kong

15 January 2018


A common challenge that many Canadian issuers are facing, especially in light of the turbulent and unpredictable capital markets in Canada in the past few years, is access to a deep and sustainable capital pool with active participation of both institutional and retail investors.

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While going public on the Toronto Stock Exchange or the TSX Venture Exchange (or other alternative exchanges such as the Canadian Securities Exchange) remains a viable option, there has been an elevated level of awareness and curiosity about the seemingly (and for the most part) untapped market in China. Hong Kong, in addition to the Shanghai Stock Exchange and the Shenzhen Stock Exchange (the only two stock exchanges in Mainland China), provides a perfect gateway to accessing Chinese and international capital. Blessed with a well-established legal system based on English common law and a sound regulatory framework with significant tax advantages and no capital flow restrictions, Canadian issuers are starting to notice Hong Kong as a strong IPO platform.

The Stock Exchange of Hong Kong (the SEHK)

Issuers planning to go public on the SEHK may list on either the Main Board or the Growth Enterprise Market (GEM). The Main Board is a market for more established issuers that meet certain profit and financial requirements of the SEHK, whereas GEM is a market for more junior issuers. Currently, there are only 5 Canadian issuers directly listed on the Main Board (and none on GEM), namely, China Gold International Resources Corp. Ltd., Manulife Financial Corporation, Persta Resources Inc., SouthGobi Resources Ltd. and Sunshine Oilsands Ltd. Depending on its particular circumstances and tax strategy, an issuer may undergo a pre-IPO restructuring and use an offshore entity as the listing vehicle (as evidenced by the popularity of using Cayman Islands and Bermuda as the incorporating jurisdictions for many SEHK listed companies).

Main Board Listing Requirements

An issuer planning to list on the Main Board must meet one of the three financial criteria:

  • Profit Test:
    • profits of at least HK$50 million (approximately CAD$8.14 million) in the last three years (meaning at least HK$20 million (approximately CAD$3.26 million) in the most recent year and a combined minimum of HK$30 million (approximately CAD$4.88 million) in the two preceding years); and
    • a minimum market capitalization of HK$200 million (approximately CAD$32.56 million) at the time of listing
  • Market Cap/Revenue Test:
    • a minimum market capitalization of HK$4 billion (approximately CAD$651.29 million) at the time of listing; and
    • revenue of at least HK$500 million (approximately CAD$81.41 million) for the most recent financial year
  • Market Cap/Revenue/Cash Flow Test:
    • a minimum market capitalization of HK$2 billion (approximately CAD$325.64 million) at the time of listing;
    • revenue of at least HK$500 million (approximately CAD$81.41 million) for the most recent financial year; and
    • positive operating cashflow of at least HK$100 million (approximately CAD$16.28 million) in aggregate for the three preceding financial years

Market capitalization at the time of listing is determined by multiplying the number of issued shares by the expected issue price.

Subject to certain exceptions and waivers, the issuer is expected to have management continuity for at least the three preceding financial years and ownership continuity and control for at least the most recent financial year. Also, depending on the size of the issuer's market capitalization, a minimum ranging from 15% to 25% of its issued and outstanding share capital (subject to a minimum of HK$50 million (approximately CAD$8.12 million)) must be held by the public at any given time.

There are additional listing requirements applicable to oil and gas issuers and mining issuers:

  • the issuer must have discovered at least a portfolio of "indicated resources" or "contingent resources", measured in accordance with an accepted reporting standard (e.g. the Petroleum Resources Management System (PRMS)) and detailed in a competent person's report (i.e. independent engineering evaluation of reserves and/or resources) which must be included in the prospectus;
  • if the issuer has not begun production, it must disclose its production plans with indicative dates and costs supported by a study (which in the case of mining issuers must be at least a scoping study) and an opinion of a competent person; and
  • if the issuer intends to seek a waiver from certain financial thresholds, it must establish that its directors and senior managers have sufficient experience relevant to the exploration and/or extraction activity that the issuer is pursuing (generally it means at least five years of relevant industry experience).

A Main Board applicant is required to engage a sponsor to assist with its IPO and listing application. Three years of audited financial statements, prepared in accordance with Hong Kong Financial Reporting Standards, International Financial Reporting Standards or generally accepted accounting principles in the United States, are required. A Main Board issuer is also required to have at least three independent non-executive directors, at least one of whom must have appropriate professional qualifications or accounting or related financial management expertise.

GEM Listing Requirements

An issuer planning to list on GEM must meet both of the following financial criteria:

  • a minimum market capitalization of HK$100 million (approximately CAD$16.25 million) at the time of listing; and
  • positive operating cashflow of at least HK$20 million (approximately CAD$3.25 million) in aggregate for the two preceding financial years

Subject to certain exceptions and waivers, the issuer is expected to have management continuity for at least the two preceding financial years and ownership continuity and control for at least the most recent financial year. Also, depending on the size of the issuer's market capitalization, a minimum ranging from 15% to 25% of its issued and outstanding share capital (subject to a minimum of HK$30 million (approximately CAD$4.87 million)) must be held by the public at any given time.

Those additional requirements applicable to a Main Board oil and gas or mining applicant, as referenced above, remain applicable to a GEM oil and gas or mining applicant.

A GEM applicant is required to engage a sponsor to assist with its IPO and listing application. Two years of audited financial statements, prepared in accordance with Hong Kong Financial Reporting Standards, International Financial Reporting Standards or generally accepted accounting principles in the United States, are required. A GEM issuer is also required to have at least three independent non-executive directors, at least one of whom must have appropriate professional qualifications or accounting or related financial management expertise.

Issuers that have been listed on GEM for at least a year and met the Main Board admission requirements may graduate to the Main Board without a sponsor.

Process

If the Canadian issuer itself is the listing vehicle, there will be Canadian securities law implications as the issuer will be distributing securities (albeit in a foreign jurisdiction) without a Canadian prospectus and all of the issuer's outstanding securities prior to completion of the IPO will remain subject to an indefinite hold period unless it becomes a reporting issuer in at least one Canadian province or territory. One advantage of using this approach (as opposed to using an offshore entity as the listing vehicle) is that it would make things easier should the issuer decide to dual list in Canada down the road.

In general, the bulk of the IPO work involves the preparation of the listing application, accountants' report and the prospectus. If the draft application is recommended for acceptance by the listing division of the SEHK, there will be a hearing before the listing committee (only for Main Board applicants). Once approved, the issuer can proceed to issue the listing documents, go on roadshows to promote to investors and close the IPO. If the applicant does not require any substantial pre-IPO restructuring and can readily meet the listing requirements without the need for waivers from the SEHK, the entire IPO process can take, conservatively speaking, about five to six months from the first planning meeting to closing.

A growing number of overseas companies eyeing opportunities in Mainland China have been seeking listings on the SEHK, especially in light of SEHK's plan to lift its longstanding restriction on dual class share structures, which could come into force as early as the second half of 2018. Hong Kong presents an attractive going public platform to the traditional route of getting listed on the Toronto Stock Exchange or the TSX Venture Exchange. As a first step, issuers interested in exploring this option should reach out to professional advisors with Hong Kong IPO experience and expertise and also the language capabilities and cultural know-how to help navigate this intensive yet rewarding process.

The SEHK listing rules are lengthy and complex. The foregoing is only a selected summary of certain SEHK listing requirements, which are subject to change by the SEHK from time to time.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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