28 October 2016
Tech companies, like this one in Beijing, may find it harder to pursue a listing in Hong Kong than in the United States. Photo: CNSA
Tech companies, like this one in Beijing, may find it harder to pursue a listing in Hong Kong than in the United States. Photo: CNSA

Tech firms deterred by Hong Kong IPO rules

People usually think investors in US stock markets have higher acceptance level for high-tech companies, while Hong Kong investors prefer traditional industries.

I have gained a deeper understanding of this matter after meeting people who plan to list their high-tech firms in Hong Kong.

Indeed, it’s not only due to the difference in investors, but in the whole regulatory mechanism and professional intermediaries like investment banks and law firms involved.

First of all, let’s talk about the regulatory system. Disclosure is the key under US rules. The regulators, in most cases, will not judge whether a certain business is suitable to go public as long as the company provides sufficient disclosure materials which enable investors to fully understand the nature and risks of the business.

In other words, regulators don’t care about what a company does as long as it follows the rules. If things go wrong, investors can always file a class action against the company.

However, in Hong Kong, maybe because of the absence of such rules as an investor class action, regulators also play the role of judges to protect individual investors and regulate a company’s business.

Also, unlike in the United States, Hong Kong has an underwriting mechanism. The underwriters have legal responsibilities over the listed companies.

I believe the intention of those rules is good. But the implication makes all the participants of the listing process (companies and intermediaries) act in a more conservative manner, trying to do everything within the regulators’ understanding.

The new stuff, the innovative ideas, even if they are very important, may be excluded from the prospectuses.

When discussing how to introduce a business in the prospectus, the companies, investment bankers or lawyers would rather focus on how to let the regulators accept the explanation than reflect the real company or market situation.

Being “too innovative” is not acceptable. Thus, being “new” becomes a disadvantage for high-tech firms.

The other notable difference is about “materiality”. One can look at a company from various angles. Under US rules, a company can use the “rule of materiality” to emphasize a certain business or briefly introduce its other businesses.

But in Hong Kong, the regulator has an existing “template” for the listing documents. Every item included in the “template” must be filled, regardless of whether it is material or not.

Thus, companies, along with their investment banks and lawyers, take much effort to explain businesses that “nobody cares” when writing the prospectuses.

Hong Kong-style prospectuses are usually much thicker than those in the US. But it doesn’t mean Hong Kong prospectuses are more useful for investors.

Actually, they could be more confusing. The situation is worse for high-tech firms because the “template” is designed for traditional industries.

As for intermediaries, Hong Kong investment banks and lawyers are more familiar with cases in real estate, state-owned enterprises and banking, among other sectors.

Only certain foreign investment banks have specialties in high-tech or internet companies. (But the deal size should be big enough for foreign investment banks.)

And here’s a true story showing just how difficult it could be to list a high-tech firm. A certain technology company is about to go public in Hong Kong. But the managing director of the investment bank handling the IPO cannot even tell the difference between a router and a gateway, a basic knowledge in information technology.

If an intermediary doesn’t understand such basic terms, how do you expect the firm to be able to explain its business to prospective investors?

This article appeared in the Hong Kong Economic Journal on Sept. 29.

Translation by Myssie You

[Chinese version中文版]

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