Hong Kong’s new start-up board is a dream come true, for all the wrong reasons
To the creative minds in mainland China, the recent proposal of a new board for start-up companies by the Hong Kong Stock Exchange is a dream come true.
Unfortunately, all that glitters is not gold, and investors have seen plenty of the exchange’s creativity, which doesn’t quite extend to finding a cure for cancer or building cars than run on ethanol.
Imagine you are one of those eager beavers keen to make a quick fortune by listing a too-good-to-be-true business in Hong Kong.
You will need some sort of operating business, a dozen friends to dress up as suppliers and customers, a friendly banker to verify your cash flow, an auditor to sign off on your exaggerated profit, a sponsor to package these together, and the money to pay off all of the above.
If the HKEX succeeds in introducing the low regulatory burden market, the New Board Pro, you won’t need any of the above. This is because you won’t need a profit track record, a financial statement, a sponsor or a prospectus, according to consultation paper released last week.
You need only two things. Firstly, a market capitalisation of HK$200 million (US$25.6 million). As long as you can promise a 20 per cent post-IPO increase in your stock price, there are “specialists” to help. That will cost a little, but it’s worth it.
Secondly, you have to dress up as a company operating in the New Economy, and be of high growth potential. It may be easier than it sounds. That’s because the decision will be made by officers of the Listing Department, who have already given their nods to allow the listing of builders, tutorial schools, restaurants and bars on Hong Kong’s Growth Enterprise Market (GEM). Do you expect them to turn New Economy concepts down?
On what basis will they prove that yours is not New Economy? What is New Economy, after all? If there is a definition, there will be a way. If technology accreditation is needed, you can buy one.
As for the “requirement” of high potential growth, what expertise do these officers possess to tell the difference? If there’s any, he or she would have long left for the much better paid private equity funds.
Besides, they would be too busy too tell. Once the new market is launched, they would be flooded with applications.
More than 800 companies are queuing up for China’s new Third Board, where trading is over the counter and liquidity is poor.
Two-thirds of them carry the word internet, keji (科技) or technology, in their names. There’s the so-and-so seed technology, plastic technology, crystal technology, kitchen technology, matchbox technology….. (Get the idea?)
The Exchange plans to mitigate the risk by allowing only professional investors in this market. Other than corporate and financial institutions, that includes private individuals with more than HK$8 million in their asset portfolio, under Hong Kong’s laws.
That won’t be a concern for any “creative” mind from Mainland China. They are master navigators when it comes to circumventing red lines.
How about a trust product with returns linked to the New Board Pro? How are brokers in Hong Kong going to figure out his corporate client has sold such a scheme?
The larger the price swing, the higher the incentive to cross the red line. For a stock that starts off with a market capitalisation of only HK$200 million and a free float of HK$45 million, a big swing will not be too difficult to manage.
If enough mainlanders have climbed over all the regulatory hurdles to bet on the con stocks (老千股) that are trading at a few cents and runs no business and to get China regulator to raise the issue with their Hong Kong peers, why should we believe the New Board Pro will be excused?
So put up a fake, list it on the new board, publicise it on the mainland chat rooms and reap the windfall. The best part is you won’t even have to go to jail for any of that, as long as you don’t travel to Hong Kong. Isn’t that a dream come true?
Some will accuse Money Matters of being too cynical, pointing to the limited number of China-related frauds in London’s Alternative Investment Market (AIM) which is more lax than the new proposed board.
The big difference is Hong Kong is in China’s time zone and the two are tightly intertwined at both the institutional and personal levels. Convenience means lower cost for good and bad operations.