Size matters

I refer to Jake Van der Kamp's column 'Big nugget of wisdom in the Golden Rule' (August 26).

I do not agree that the introduction of a size-of-asset test as an alternative to a three-year profit requirement would be disadvantageous to Hong Kong investors and the Hong Kong Exchange. Broadly, there are two points. First, the international experience, but second, and more importantly, the simple power of the market to determine whether a listing will be successful or not.

Every other international exchange (New York, London, Tokyo, Singapore and the Australian Stock Exchange) has as an alternative to some profit test criteria, a size-of-asset test or market-capitalisation test for listing. I accept that 'Exchanges that have investor interests at heart and make their rules on that basis are successful and grow. Those that will not do so wither . . .' The international evidence indicates that successful exchanges consider an asset-size test a desirable alternative to a profit test.

But let us concede that simply because these exchanges have this alternative does not necessarily make it correct. I again agree that 'it is investors who provide the money and they therefore make the rules'. Provided that investors are adequately informed as to the proposed stock offering (pursuant to the prospectus rules), the investors will either want the stock or they will not. Whether the company has a trading record or a sufficient market capitalisation will not determine the success or failure of an issue. The investors will determine this fate.

Despite the free-market credentials of Hong Kong, it is a paradox that a most basic capital-raising objective is not permitted. That is, a promoter issues a prospectus to investors who will either like it or not. As they say, you pay your money and take your chances. Again subject to adequate disclosure, such a promoter cannot, unlike in every other major stock exchange, obtain a list in Hong Kong.

This is a serious disadvantage for Hong Kong as an international exchange. The ability to raise capital and obtain a listing for a new venture which does not have a profit record is a most basic function of a capital market. Hong Kong not only does not have rules that permit this but prohibits such capital-raising. If the market had a negative view of such a venture, investors simply would not invest.