Hong Kong's specialist technology chapter (18C)

Chapter 18C of the Main Board Listing Rules exists for one kind of applicant: a Specialist Technology Company that cannot satisfy any of the three standard financial tests in rule 8.05, namely the profit test in rule 8.05(1), the market capitalisation, revenue and cash flow test in rule 8.05(2), or the market capitalisation and revenue test in rule 8.05(3)¹. In place of those tests it asks different questions: how large the company is at listing, how much of its spending goes into research, and who has already invested at a negotiated price.

The Exchange's description of the company it has in mind is precise. It is one primarily engaged in the research and development of, and the commercialisation or sales of, products or services that apply science or technology within an acceptable sector of the specialist technology industries set out in Chapter 2.5 of the Guide for New Listing Applicants³. We read the chapter as a route for the pre-profit, research-heavy business, not as a relaxation of the Exchange's standards elsewhere.

The rest of Chapter 8 still applies

Rule 18C.02 requires an applicant to satisfy the requirements of Chapter 8 other than rules 8.05, 8.05A and 8.05B¹. The financial tests are set aside. Suitability, management continuity and the ordinary listing conditions are not.

An applicant must demonstrate that it meets the definition of a Specialist Technology Company and that it is both eligible and suitable for listing as either a Commercial Company or a Pre-Commercial Company¹. It must have been in operation in its current line of business for at least three financial years before listing, under substantially the same management¹. It must also have engaged in the research and development of its Specialist Technology Products for at least three financial years before listing¹.

The practical reading is that Chapter 18C waives the profit and cash flow history, not the operating history. A company that has recently changed its line of business, or the people running it, meets its first obstacle here.

Commercial or Pre-Commercial

The chapter divides applicants by revenue. A Commercial Company is a Specialist Technology Company with revenue of at least HK$250 million for its most recent audited financial year^{1, 2}. A Pre-Commercial Company is one that has not met that revenue requirement at the time of listing^{1, 2}.

The label decides which thresholds apply to everything else. A Pre-Commercial Company has no revenue floor to clear, and is asked for more in each other dimension: a larger market capitalisation, a heavier research ratio and a larger allocation to independent price setting investors. It makes its case on where its revenue is heading rather than where it has been.

Market capitalisation, and the temporary cut

As written, rule 18C.03(3) requires an initial market capitalisation at the time of listing of at least HK$6 billion for a Commercial Company and at least HK$10 billion for a Pre-Commercial Company¹.

On 23 August 2024 the Securities and Futures Commission and the Exchange jointly announced temporary modifications to those figures, with effect from 1 September 2024³. The minimum under rule 18C.03(3) was reduced from HK$6 billion to HK$4 billion for Commercial Companies and from HK$10 billion to HK$8 billion for Pre-Commercial Companies³. The Exchange's guidance letter on Specialist Technology Companies now carries the modified figures².

The reduction runs for a fixed period of three years, from 1 September 2024 to 31 August 2027, which the announcement calls the Implementation Period³. The modified thresholds apply to every Chapter 18C applicant whose expected listing date is on or after 1 September 2024 and whose listing application, including any renewal of it, is submitted on or before 31 August 2027³. Before that end date the Exchange may review the requirements and consult the market if necessary³. The stated reason is a recognition of recent market conditions and an intention to keep a viable listing pathway open for new economy companies with high growth potential³.

We treat the lower figures as the working thresholds for any application filed inside the window, and the original figures as the ones to plan around if a timetable risks slipping past August 2027. For a mid-market technology business in North America or Australia, the gap between the two sets of figures is often the difference between a conversation about Hong Kong and no conversation.

Research and development spend

Chapter 18C measures research intensity as a share of total operating expenditure, on a scale that rises as revenue falls. The expenditure counted is that incurred on the research and development of the applicant's Specialist Technology Products¹. The tiers are:

• a Commercial Company: at least 15% of total operating expenditure¹.
• a Pre-Commercial Company with revenue of at least HK$150 million but less than HK$250 million for its most recent audited financial year: at least 30%¹.
• a Pre-Commercial Company with revenue below HK$150 million for that year: at least 50%¹.

The test is applied twice. The applicable percentage must be met on a yearly basis for at least two of the three financial years before listing, and on an aggregate basis across all three¹. One strong year does not carry a weak one, and a strong aggregate does not excuse two weak years. The classification of costs between research and operating expenditure moves the answer more often than the level of spend, so the reconciliation belongs with the auditors early.

Investors before and at the IPO

Two investor requirements sit beside the financial ones. First, an applicant must have received meaningful investment from sophisticated independent investors before listing¹. The independence and qualification requirements for those investors are set out in Chapter 2.5 of the Guide for New Listing Applicants³. The Exchange has said the Chapter 18C independence test was designed to address the difficulty of valuing Specialist Technology Companies³. Independent capital at a negotiated price is, in effect, the Exchange's substitute for a profit record.

Second, at least 50% of the total number of shares offered in the initial public offering, excluding any shares issued under an over-allotment option, must be taken up by independent price setting investors in the placing tranche, whether as Cornerstone Investors or otherwise¹. The guidance letter adds a minimum allocation to those investors that scales with market capitalisation. For a Commercial Company at HK$4 billion or more but below HK$15 billion, or a Pre-Commercial Company at HK$8 billion or more but below HK$15 billion, the minimum is 20% and 25% respectively². From HK$15 billion to below HK$30 billion it is 15% and 20%². At HK$30 billion or more it is 10% and 15%².

The next step

The first piece of work is a three-year reconciliation. Take the last three audited financial years, classify research and development expenditure against total operating expenditure under the definitions in rule 18C.04, and test the ratio year by year and in aggregate¹. Set the most recent year's revenue against the HK$250 million line to fix whether the company is Commercial or Pre-Commercial¹, and set its likely valuation against HK$4 billion or HK$8 billion³. Then list every investor on the register against the sophisticated independent investor criteria in Chapter 2.5 of the Guide³. With those three schedules in hand, a company is ready to brief a sponsor and set a filing date that lands the application before 31 August 2027³.

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