Mainland tech firms that plan to shift US listing to Hong Kong face uphill battle due to tougher rules

  • US has a disclosure based procedure for listing candidates while in Hong Kong regulators vet a company to decide if it is fit for listing
  • The time taken to list will probably be extended by at least two to three months if Chinese firms decide to shift from the US to Hong Kong

Hong Kong may be the obvious listing destination for Chinese tech companies after Beijing tightened rules on overseas listings. Stringent accounting and disclosure hurdles as well as tougher regulatory vetting suggest not all will make the cut, accountants and lawyers warned.

Companies that want to shift their listing from the US to Hong Kong may have to rework their accounts and application documents to comply with the tougher standards imposed by the Hong Kong bourse operator than US exchanges, they added.

Some of the biggest differences include accounting principles and reporting standards, offshore ownership structures and classes of shares with variable voting rights.

“Listing requirements in Hong Kong are stricter,” said Wang Hang, a partner at legal firm Baker McKenzie in Beijing. “The key is to evaluate whether the issuer can fulfil the listing conditions. That is to say, not all of these companies are capable of shifting [their choice of venue] to Hong Kong.”

Vegetable-delivery firm Meicai has paused its US IPO plans

Heightened scrutiny of China’s tech giants has unnerved investors and caused a number of mainland and Hong Kong companies to pause their US listing plans or opt for Hong Kong to raise capital from investors. They included lifestyle platform Xiaohongshu or Little Red Book, vegetable-delivery firm Meicai and logistics start-up Lalamove.

China’s top cybersecurity regulator on July 3 unveiled draft rules under which it would review any foreign listings by technology platform companies that possess the data of at least 1 million users. That followed a probe into dominant ride-hailing operator Didi Chuxing days after its US$4.4 billion New York stock offering.

A closer look at the listing rules in Hong Kong and the US – which dominated Chinese stock listings in the past decade – will show that it is not as easy as flipping a switch.

The first major difference between the two markets is the accounting standards, according to Johnny Lam, deputy president for Greater China at CPA Australia, an accounting industry body.

Under the US listing requirements, companies must use Generally Accepted Accounting Principles (GAAP), while Hong Kong applies the local Financial Reporting Standard or International Financial Reporting Standards.

In terms of requirements in the prospectus, the US promotes a disclosure-based regime, under which listing candidates are required to provide extensive information for the investing public to know about their key financials and risk factors.

The regulators in the US, however, do not vet the suitability of the issuers, Lam added. If there is a problem after the listing, investors can seek recourse by taking class-action lawsuits against the issuers.

Experts see Hong Kong to be a tougher market as it adopts a merit-based regulation. Market regulators, including the Securities and Futures Commission as well as Hong Kong Exchanges and Clearing, vet offering documents and other materials provided by the candidates to protect the interests of retail investors.

Issuers planning to list in Hong Kong are required to prepare the initial public offering (IPO) prospectus in accordance with the Hong Kong listing rules and face a vetting process by regulators, said Stephen Chan Yiu-kwong, a partner at the law firm Dechert.

“Normally, an issuer will engage sponsors and other professional parties based in Hong Kong to assist with the commencement of the IPO application process,” he added.

Another key difference is the issue of shareholding structure. Many technology companies have preferred to list in the US in the past as it has no restrictions on weighted voting right structure, a popular design for many tech founders who tend to own a small but controlling stake in their companies.

While Hong Kong reformed its listing rules in 2018 to lure companies with weighted voting rights, the bourse still retained a high degree of restrictions. It only allows a person, who must be a key member of management and a director, to own shares with higher voting rights.

Hong Kong also bars corporations from holding such equity unlike in the US. The city also limits each premium class of share with a voting right of up to 10 times the ordinary class of shares, while the US exchanges do not impose any limit.

Company executives, their sponsors and investment bankers should thus allow themselves more time to eventually reach the market.

“The time taken for companies to list could be delayed by at least two to three months if the mainland companies decide to shift from the US to Hong Kong,” Lam at CPA Australia said.

Author: Enoch Yiu, South China Morning Post

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