Startups shut out of US face tougher Hong Kong IPO rules

Stringent demand: The Exchange Square in Hong Kong. HKEX will raise the annual profit requirement for a main board listing. — AFP

HONG KONG: Chinese startups hungry for foreign capital are increasingly turning to Hong Kong as hurdles to list in the United States multiply. But not every firm will make the cut, and those that do might have to settle for lower valuations.

Hong Kong Exchanges and Clearing Ltd (HKEX) makes far more stringent demands on companies planning a listing than its New York peers.

Firms likely to struggle include unprofitable startups with little revenue such as those developing autonomous driving cars, or companies in industries including ride-hailing, which operate in a legal gray zone.

For example Didi Global Inc, whose US listing triggered a cascade of regulatory action from Beijing.

The Softbank-backed ride-hailing giant had explored the feasibility of a Hong Kong listing before it settled for the United States.

Didi found it hard to satisfy Hong Kong’s requirement that its operations be legally compliant given China’s complex licensing norms for businesses, vehicles and drivers.

Its smaller rival, Dida Inc, has run into similar problems. When the company applied in October to list in Hong Kong, questions from the exchange over compliance with local Chinese regulations were a sticking point, sources said.

Dida’s application lapsed in April, though it has since re-applied.

In the United States, the Securities and Exchange Commission simply demands a full disclosure of the risks.

“The Hong Kong regulators take a slightly more paternalistic approach to approving initial public offerings (IPOs),” said Vivian Yiu, a Hong Kong-based partner at Morrison & Foerster, who focuses on equity offerings in Hong Kong and mergers and acquisitions.

And in some ways, the exchange is getting tougher.

HKEX will raise the annual profit requirement for a main board listing and has vowed to crack down on suspicious IPO activities such as inflating the market capitalisation of firms.

Still, boosting Hong Kong’s appeal are signs Beijing won’t require a cybersecurity review for firms listing in the Asian hub as it overhauls rules for foreign IPOs.

Many speculate the increased scrutiny will be used to end the flood of Chinese companies going public in New York, particularly technology firms that control reams of user data.

At the United States end, regulators are also demanding new disclosures before signing off on listings.

Chinese on-demand logistic and delivery firm Lalamove and vegetable supplier Meicai are both weighing rerouting their planned US market debuts to Hong Kong, Bloomberg reported last month. — Bloomberg

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