Mainland Chinese start-ups are keen to list on the proposed third board by Hong Kong Exchanges and Clearing, but they face opposition from those who worry about the potential impact on the reputation of companies on the new stock market. HKEx chief executive Charles Li Xiaojia said last month it was weighing the launch a third board which would compliment the main board and the Growth Enterprise Market (GEM). The new board would be tailor-made for start-ups that do not meet the profit requirements necessary for a main board listing, or operational requirements to qualify for GEM. The controversial proposal has supporters and opponents. Securities and Futures Commission chairman Carlson Tong Ka-shing said the launch of the new market should only come after a review of the GEM. Meanwhile, financial Services Development Council chairwoman Laura Cha added her support for the new board, saying it would provide more choices for companies and investors. However, local professionals expressed mixed feelings about the proposal. Louis Tse Ming-kwong, a director of VC Brokerage, said he was opposed, citing the recent experience in Beijing as an example of why it was a bad idea to lower entry requirements. The new board on the Chinese mainland known as the National Equities Exchange and Quotations, has low entry requirement for start-ups. So far it has attracted 5,956 companies, many of them technology, biochemical and new industry-related concepts. That compares to the 2,700 companies listed in Shanghai and Shenzhen combined. However, daily turnover for the new board stood at only 552.66 million yuan (HK$659.1 million) on Wednesday, representing less than 1 per cent of daily turnover in the Shanghai market. “The Beijing third board is a prime example that if you lower the listing criteria, you can easily attracted a huge number of companies to list. However, you cannot attract much turnover as investors would worry about the quality of the companies as many are new companies with few assets,” Tse said. “The third board is not a good idea. We should pursue quality firms and not quantity. If we have a new market flooded with poor quality firms, it would affect the overall quality of Hong Kong market and discourage reputable company from listing,” Tse said. The GEM, set up in 1999, was envisioned as Hong Kong’s version of Nasdaq with the intention of attracting hi-tech firms. The GEM does not require companies to show a profit, however they are required to be in business for at least two years and have a cash flow of HK$20 million. Many start-ups are likely to find that threshold too high, while some larger tech companies are likely to prefer a main board listing. The GEM hosts 226 companies, compared with 1,649 on the main board. The daily turnover of GEM stood at HK$476 million on Wednesday, or about 0.8 per cent of the daily turnover of the main board. Benny Mau, chairman of Hong Kong Securities Association, said GEM has already set its listing requirements at a low level, but if need be, the authorities could lower the bar on annual cash flow or ease up on the two-year operational requirement. “This means companies that have only a few million on hand can still go public on the proposed third board. But I think that threshold is too low, these companies should raise fund from venture capitalists or private equity and not retail investors,” he said. Mau said the exchange may want to launch the third board as a way to attract some companies which have a special shareholding structure. Hong Kong does not allow companies with dual share structures, which has led Alibaba and other technology giants to shift to the US where such structures are allowed. “Mainland stock markets have many restrictions while Hong Kong is a free and international market. If Hong Kong would launch the third board, it would attract mainland firms to list here,” Mau said. “However, we need to first think what to do with the GEM and the regulatory issues of this new market.” Hong Kong Institute of Certified Public Accountants president Ivy Cheung Wing-han said there would be strong demand from mainland firms for an international listing. “However, many starts up would likely to fail, the risks of investing in these companies are very high. We need to think of ways to protect the investors and let them be aware of the high risks,” she said. Keith Pogson, a senior partner with accounting firm EY said it is hard to get the right regulatory mix, as lowering barriers to market access involves trade offs. Among the key benefits is the ability to speed the development of next generation companies. “However, there are challenges around investor protection,” Pogson said. “Third boards are generally far higher risk for investors due to lower listing hurdles, but often can allow high growth stocks access. There’s no reward without risk.”