This guide will provide an overview of how to convert your private company to a public listed company in Hong Kong. It will also outline the benefits and drawbacks of taking your private company public and help you decide if your company is ready for a listing.

Some of the common reasons why private company may decide to become a public company include gaining access to capital, providing liquidity for the private shareholders, enhancing the status of the company and acquiring high visibility in the market. However, not all private companies are qualified to become public listed companies. Generally, only those private companies that are well established dominant players in the market with significant growth potential decide to go public.

Before you decide to go public, it is important to understand the implications of a listing exercise and the impact it will have on your organization. Some of the questions you must ask beforehand are: What is the rationale for going public? What does the listing exercise entail? Is the company and its management ready to take on the rigorous on-going obligations of a public company? Is the management ready to accept the loss of confidentiality that arises as a result of going public?

Public Companies Vs Private Companies

There are two major types of companies you can form in Hong Kong – private companies and public companies. Listed below is a comparison of key features of both these types of companies.

A private company is one which:

  • limits the shareholders’ rights to transfer their shares
  • has a maximum of 50 shareholders
  • disallows any invitation to the public to subscribe to the shares of the company

A public listed company is one which:

  • can raise capital by offering transferable shares to the public
  • can have more than 50 shareholders
  • can trade its shares and/or debentures on the Stock Exchange (after due approval from the Hong Kong Stock Exchange)

Considerations for Going Public

The decision to go public is an important one and must be made after an assessment of the overall implications of doing so. You must carefully weigh the pros and cons of going public in the light of the plans and goals you have set for your company.

Going Public: Benefits

  • Ease of raising capital – One of the main reasons for a private company to go public is the financial benefit of being able to raise more capital. A public listed company can raise substantial share capital by inviting the general public to subscribe for its shares. Since the company is listed on the stock exchange it generates publicity and promotes the company to potential customers. This in turn can lead to an increase in market share for the company in its respective market.
  • Incentive – Public listed companies can offer stock as an incentive to their current and future employees. This is often instrumental in attracting and keeping key personnel.
  • Liquidity – Stockholders of public listed companies can sell their shares in the open market. This provides investors or company owners with an exit strategy and portfolio diversity.
  • Prestige – A public offering of stock implies stability and can help a Hong Kong listed company gain prestige. Prestige can be very helpful in recruiting key employees and in marketing products and services. Investors will be more willing to become a part of the company as it demonstrates a vision to grow and expand.
  • Image – The perception of a company amongst its vendors, employees, bankers and customers can significantly alter the destiny of a company. A public listed company communicates seriousness, credibility and stature.
  • Publicity – A public listed company always receives more publicity and media attention than a private enterprise. This is often advantageous as it helps to inform the company’s potential customers, employees, vendors etc. about the company, its products and services.
  • Mergers and Acquisitions – Since a public listed company has an assigned currency value to its stock, it becomes easier for the company to merge with and/or acquire other companies by using its stock as currency.

Going Public: Drawbacks

  • No confidentiality – Public companies operate under close public scrutiny. Hong Kong listed companies have to adhere to a number of disclosure requirements such as disclosing how proceeds raised in the share offering have been utilized, disclosing the company’s financial results etc.
  • Added Cost – The costs of IPO offering and complying with regulatory requirements can be very high. Some of the additional costs include accounting fees, legal fees, miscellaneous fees and professional adviser fees.
  • Liability Exposure – Public companies, their officers and directors face the risk of civil liability for providing false or misleading information.
  • Time consuming – Taking a private company public is not only complex but also a time consuming process.
  • Reporting and Fiduciary Responsibilities – There are a number of rigorous on-going obligations that is demanded of a listed company and the company directors have to fulfill certain fiduciary duties. This can be time consuming and expensive.

Listing Procedure in Hong Kong

Once you decide to take your private company public, you will have to follow a set procedure for converting a private company into a public listed one.

The first step in converting from private to public is to undertake a process called due diligence. Due diligence is the analysis and valuation of a company and is usually performed by a professional accountancy firm. It examines if the company’s operational ability, its corporate governance policies, its internal control environment, its financial reporting procedures and if other aspects of the business are in line with the requirements for listed companies. The due diligence procedure helps to identify any potential shortfalls so that the company can take corrective action prior to listing. All reports prepared as part of the due diligence procedure, must be prepared by professional accountants who are qualified under the Professional Accountants Ordinance. The report must also be prepared in accordance with relevant accounting standards and regulatory guidelines. The company also needs to appoint a lawyer to oversee the legal aspects of the entire listing process.

The due diligence procedure also involves valuation of the company. Based on the valuation report, which is prepared by an appointed valuer, a value is assigned to the company and an appropriate number of shares are issued.

At this stage, the investing public is offered an opportunity to buy the shares of the company. This is called the Initial Public Offering (IPO). The procedure involves deciding the number and the issue price of shares to be issued. The company will then have to submit a draft prospectus to the Stock Exchange for its comments and approval. The prospectus contains information about the company’s activities, assets and liabilities, financial position, management, prospects of the company, its profits and losses and rights attaching to the securities being offered.

The company must proceed to identify underwriters who would be responsible for distributing the securities of the company during a share offering. Underwriters are middlemen between the company and the investing public and are typically securities firms who are the Stock Exchange’s participants. The company will negotiate the deal with underwriters and discuss matters such as the amount of money a company will raise, the type of securities be issued, the underwriter’s commission etc. and will then proceed to sign an underwriting agreement.

The next step is to apply for a listing and permission to deal with the Stock Exchange. For this purpose the company must appoint a suitable sponsor for its listing proposal. A sponsor must be a corporation or an authorized financial institution licensed or registered by the Securities and Futures Commission. The sponsor will be responsible for preparing the company for listing, for lodging the formal listing application and all supporting documents with the Exchange, and for dealing with the Exchange on all matters arising in connection with the application.

Companies may be listed on the Main Board or the Growth Enterprise Market (GEM) of the Stock Exchange, in accordance with the Main Board Listing Rules and GEM Listing Rules. The Main Board is suitable for larger and more established companies with at least 3 years’ profit track record. Equity securities can be listed on the Main Board in the form of shares or depositary receipts. Companies who do not meet the Main Board’s criteria can list on GEM. GEM is a second board and a stepping-stone towards the Main Board. Equity securities can only be listed in the form of shares in GEM.

Once the company receives authorization from the Stock Exchange it must register the prospectus with the Companies Registry and publish it so as to make it available to the general public. It must also advertise an announcement regarding the placing on the Stock Exchange’s website. The company can then proceed to authorize the allotment of shares and issue of share certificates.

Depending on the complexity of the company, the listing process may vary between 4 months to 2 years.

Listing Requirements in Hong Kong

Tabulated below is an at-a-glance summary of the Main Board and GEM listing requirements.

Main Board GEM
Types of Securities Equities (shares and depositary receipts), debts, third party derivatives, unit trusts and investment vehicles. Equities (shares only) and debt securities (options, warrants and convertible securities).
Listing Debt Securities Allowed. Allowed, subject to certain conditions.
Market Suitability Large and well-established companies that meet the Main Board’s financial requirements. Companies who do not meet the Main Board’s criteria.
Minimum Trading Record 3 financial years. 2 financial years.
Financial Requirement Must meet one of the three financial criteria:
– Profit Test
– Market Capitalization/Revenue/CashflowTest
– Market Capitalization/Revenue Test		 – No Profit Requirement
– Market Capitalization of at least HK$100 million (approx. US$13 million) at the time of listing.
– Positive cashflow from operating activities of at least HK$20 million (approx. US$2.6 million) in aggregate for the two preceding financial years.
Required No. of years of Management Continuity 3 preceding financial years. 2 preceding financial years.
Required No.of years of Ownership Continuity At least for the most recent audited financial year. For the preceding full financial year.
Statement of Future Business Plans and Prospects No specific requirement. New applicants are expected to provide a general statement of future plans and prospects. Must state business objectives for the remaining financial year during which listing occurs and for 2 financial years thereafter.
Minimum Market Capitalization For shares and Depository Receipts: At least HK$200 million (approx. US$26 million) at the time of listing.

For options, warrants or similar rights: HK$10 million (approx. US$1.3 million) at the time of listing.

 For shares and Depository Receipts: At least HK$100 million (approx. US$13 million) at the time of listing.

For options, warrants or similar rights: HK$6 million (approx. US$0.8 million) at the time of listing.
Minimum Public Float At least 25% of the issuer’s total issued share capital subject to a minimum of HK$50 million (approx. US$6.4 million) must at all times be held by the public. At least 25% of the issuer’s total issued share capital subject to a minimum of HK$30 million (approx. US$3.8 million) must at all times be held by the public.
Competing Businesses of Directors or Controlling Shareholders Allowed, but full disclosure is required. Allowed, but full disclosure is required.
Underwriting Requirement New issue must be fully underwritten. Not Required.
Offering Mechanism Restrictions May not list by way of placing only. May list by way of placing only.
Shareholders Spread The equity securities in the hands of the public should be held among at least 300 holders (if qualifying under the Profit test or Market Cap/Revenue/Cashflow test) and 1,000 holders (if qualifying under the Market Cap/Revenue test). The equity securities in the hands of the public should be held among at least 100 holders.
Acceptable Jurisdictions Hong Kong, Mainland China, Bermuda, Cayman Islands, Australia and Canada. Other jurisdictions that prove that their standards of shareholder protection is equivalent to that of Hong Kong’s. Same as that of Main Board.
Accountants’ Report Must be prepared in accordance with either HKFRS1 or IFRS2. US GAAP3 is acceptable under certain circumstances.

Must be prepared for at least 3 financial years, preceding the issue of the prospectus.

 Must be prepared in accordance with either HKFRS1 or IFRS2. US GAAP3 is acceptable if the company is listed, or will be simultaneously listed, on either the NYSE or the NASDAQ National Market.

Must be prepared for at least 2 financial years, preceding the issue of the prospectus.

1HKFRS: Hong Kong Financial Reporting Standards
2IFRS: International Financial Reporting Standards
3US GAAP: Generally Accepted Accounting Principles in the United States of America

Listing Fees in Hong Kong

The listing fees payable to the Exchange for listing on the Main Board can vary between HK$150,000 (approx. US$19,300) to HK$650,000 (approx. US$83,700) depending on the monetary value of the equity securities of the company that is to be listed. GEM listing fees varies from HK$100,000 (approx. US$12,900) TO HK$200,000 (approx. US$25,750).

Ongoing Compliance of Listed Companies in Hong Kong

A listed company is under public srutiny and needs to disclose information to its investors periodically. Additionally, all listed companies in Hong Kong are required to comply with regulatory guidelines and reporting requirements. Annual reports of listed companies must be published from time to time. Some of the obligations of listed companies in Hong Kong include:

  • Corporate Governance Standards
    • Main Board and GEM listed companies must appoint
      • At least three independent non-executive directors, of whom at least one is professionally qualified or possesses accounting/financial management expertise.
      • A three-member audit committee comprising of non-executive directors
    • In addition, GEM listed companies must appoint a compliance officer.
  • General Obligations of Disclosure
    • Disclosure of Use of proceeds: Listed companies must disclose how they have applied the proceeds raised in the share offering, in their annual or half-yearly reports.
    • Disclosure of Price Sensitive Information: Listed companies must keep the Exchange and public informed of any price sensitive information that might affect market activity and the price of securities.
    • Financial Disclosure: Main Board listed companies must publish annual reports within 4 months and half-yearly reports within 3 months of the date on which the financial period ended. GEM listed companies must publish annual reports with 3 months, half-yearly and quarterly reports within 45 days of the date on which the financial period ended.
  • Other Obligations
    • Listed companies must adhere to other requirements relating to disposal of shares, issue of new shares, reverse takeovers, and securities transactions of Directors.

Finding the Right Professionals

Converting a private limited company to a public listed company is a long drawn process, involving a range of competent and experienced professionals. If you are considering going public, you should consult with a professional firm that can review your situation in detail and advise you on the best course of action.