Refusal to establish a start-up board is a competitive setback for Hong Kong
Without the so-called Third Board, start-ups will be unable to get funding at a critical stage of growth
“It’s not really money unless you use it,” as the old Cantonese saying goes. The same can be said about government power and authority. Last week, we witnessed this conundrum in action.
Hong Kong’s stock market operator and the regulator have decided, under certain conditions, to allow companies with dual-class shares to list on the city’s bourse, according to the South China Morning Post’s reports. That’s not surprising, given that it’s a competitive requirement in today’s technology-driven capital markets, since many start-ups feature founders who own stocks with extra privileges.
But it’s disappointing how they arrived at the decision of not starting a special board – the so-called Third Board for these start-ups to list.
Regulators changed their opposition to the idea after last month’s successful initial public offering by ZhongAn Online P&C Insurance, even though its profit track-record didn’t meet the main board’s requirement of a combined profit of HK$50 million in the three years before application.
Accepting dual-class shares is not quite the blasphemy against the one vote, one share philosophy that its defenders state. I have yet to see a definitive study showing that companies using a dual-class structure are necessarily governed more badly than those with a single class.
The ugly truth is that if you were to flip through the archives of Hong Kong Exchanges & Clearing, you would find many egregious announcements of related-party transactions, abusive rights issues and dubious asset transfers done by single-class share companies controlled by a majority shareholder or concert parties. You don’t need to control more than 50 per cent to wreak bad governance on minority shareholders.
The refusal to establish a start-up board is a competitive setback for Hong Kong’s struggle to reposition its economy. HKEX is understandably a profit-making organisation seeking to expand its global market share for listings, while minimising risk. They prefer to list well formed, billion dollar unicorns like ZhongAn Online.
Hong Kong’s start-up scene urgently needs funding sources between US$500,000 and US$3 million because no local fund is willing or comfortable with this level of risk. A start-up board would have provided a unique platform for them to attract capital. Without this board, seed and Series A funding will predominantly reside in China where the start-up market is more vibrant.
Yes, the regulatory and reputational risks for HKEX and SFC would be daunting, possibly unmanageable. For example, the SFC has been trying to shift the responsibility for the accuracy of the content of prospectuses onto listing sponsors. Add new tech start-ups that few people understand and young founders running amok on one of the world’s largest stock exchanges and you have a colossal recipe for reputation risk.
But, Hong Kong needs a brave spirit for economic transformation. HKEX must courageously step forward and manage onerous risks; to do the hard, not easy things. The government must persuade HKEX to be more innovative and find ways to introduce a start-up board.
Otherwise, Hong Kong start-ups will be unable to access capital at a critical stage of growth. By just concentrating on big, billion dollar listings, they will once again become passively dependent on Chinese companies coming to Hong Kong.
Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, announced new agreements with Singapore and Shenzhen to improve fintech collaboration. Seven banks in Hong Kong have been developing the “Hong Kong Trade Finance Programme”, to employ blockchain in trade finance.
According to financial data processing experts, trade finance is one of the most difficult areas of finance to digitise. Just walk into the trade finance department of any bank and you will find mountains of files.
The nature of trade spins off a trail of fragmented paperwork – letters of credit, invoices, bills of lading are exchanged by hard copy or fax. No documentation standard exists. One consultant told me that trade finance needs to be automated to eliminate the sheer volume of paperwork before it can be digitised.
Then, all the banks need to agree on a standard platform and enforce that on their clients and counterparties. You will never know if you are ambitious or foolhardy until you try to solve an unsolvable problem.