GEM tinkering exposes deep flaws
Jake van der Kamp
There are two fundamental flaws in the hasty decision over the weekend to relax the listing rules of the Growth Enterprise Market (GEM).
The first is the reasoning that it had to be done because GEM rules are more restrictive than those of competing stock markets elsewhere and this could hinder GEM's development.
The difficulty with this line of reasoning is that not all stock markets are the same.
Nasdaq in the United States may have looser requirements in some areas but this is because US securities regulation is much tighter than Hong Kong's in most other areas.
Try to list a speculative stock on Nasdaq with a prospectus to which you have no intention of adhering and from which you soon depart, leaving the people to whom you have sold the shares in the lurch.
You will spend almost every day of the next three years either in court or locked in consultations with your lawyers, defending class action suits that give you not a moment of peace.
The entire US regulatory framework including the Securities and Exchange Commission (SEC), the judicial system, tighter reporting requirements than GEM and a culture of compliance with investment law mean that the rules do not all have to be written into Nasdaq's listing requirements. They exist elsewhere.
We do not have this level of protection. The rules need to go into GEM itself because manipulators know that the rules elsewhere are often non-existent, full of holes or loosely enforced.
You cannot look at a market like this in isolation from its society. Nasdaq rules are made for the US, not Hong Kong. To get even close to the level of protection Nasdaq offers investors GEM rules must be tighter, not looser.
And this introduces the second flaw. The fact that we have a Securities and Futures Commission May give investors the impression that we have a watchdog on the prowl, just like the SEC.
But it is often a watchdog without fangs. It can act in cases of market manipulation and insider trading but it has an influence on listing rules only when they are drafted. Once approved, these rules become a stock exchange matter.
This is a particularly important point because the stock exchange is soon to become a privatised entity responsible to shareholders.
It should in normal circumstances be the job of GEM's listing committee to regulate the stocks it accepts for listing, not to promote the exchange as a market for speculative stocks, but things cannot be that way once it becomes a profit-making entity.
It is the job of directors to act in the interests of shareholders. To ask them to act in the interests of public investors who are not shareholders is to ask them to engage in a conflict of interest. The shareholders come first.
In this environment the SFC should be given more powers for investor protection or use the ones it has more aggressively.
Instead of showing its fangs, however, this watchdog has now rolled over, paws in the air.
Although it can stop changes in listing rules it has meekly accepted changing the period for 'active business pursuits' before listing to 12 months from 24 and the lock-up period for initial management shareholders to six months from two years.
What is more, because the changes cannot be made official immediately it has agreed to allow them by waiver for the time being, which directly contravenes a GEM rule prohibiting general waivers.
This now provides definite evidence that the SFC has become politicised, which is one thing a securities watchdog cannot afford to be.
Your correspondent can assure you that there are people in the SFC who object to this sort of thing and they now have a hard choice to make.
To stay in their jobs will make them party to an illusion foisted on the Hong Kong public that there is proper regulatory enforcement of the market where in fact it has been subverted.
They should now resign. Difficult or not, it is the honest thing for them to do.