Second board may become preferred financing source for tech firms d
After a long formation period, the new second board of the stock exchange is close to becoming a working reality.
Last month the exchange said it would begin accepting applications from companies seeking a listing on the new Growth Enterprise Market (GEM).
The first listing in the new market, which has less stringent listing conditions, is expected before the end of the year.
According to one report, more than 20 companies have already lined up to list on GEM, including some major technology issues.
The initial list of 30 sponsoring institutions released by the exchange last month contains a broad representation of blue chip names.
These include HSBC Investment Bank Asia and Jardine Fleming Securities. There are also several US investment banks such as J P Morgan and Goldman Sachs.
For sponsors, GEM will be a fairly long-term business. Among their many responsibilities, sponsors need to work with GEM-listed companies for two years to ensure listing rules are complied with.
The exchange is promoting GEM as a 'buyers beware' market for informed, professional investors, but some of the restrictions suggested in an earlier consultation paper have been relaxed.
For example, a $250,000 minimum transaction size mentioned in the paper as a way of protecting small investors has been dropped in the interests of preserving some liquidity in the market for GEM stocks.
Rather than setting up a special electronic bulletin board system for trading GEM stocks, as suggested in the consultation paper, they will be traded in the same way as main board stocks, through the automatic order matching system.
In another departure from the outlines offered in the consultation paper, the exchange will assume more or less the same vetting and surveillance responsibilities for GEM companies as it does for their main board counterparts.
Overall, it will be a lot easier for a company to be eligible for listing on GEM than on the main board. For a start, a company does not need any history of profitability to list on GEM, compared with the main board requirement of $50 million in profits for the previous two years.
Nor does a GEM listing candidate need the three-year trading record required of a main board company - it only needs to be able to show two years of 'active trading pursuits'.
Other GEM listing requirements are a 'focused line of business' and a minimum share capital on listing of $46 million (compared with $100 million for a main board company).
In a requirement with no equivalent for a main board candidate, at least 35 per cent of the shares in a company listing on GEM needs to be held by management and significant shareholders.
With its company-friendly listing requirements, albeit with strict disclosure rules, GEM is likely to become a popular fund-raising forum for technology companies.
The technology sector has been enjoying tremendous interest from investors worldwide, and more recently in Hong Kong as the Government attempts to steer the economy on to a new technology track.
While there are venture capitalists active in the Hong Kong market, GEM will provide new technology companies with the access to the far bigger cash reserves of the wider investment market.
