HK targets next Alibaba in revamp of IPO rules

HK targets next Alibaba in revamp of IPO rules

Hong Kong’s stock exchange proposed to let “innovative” companies list in the Chinese enclave with dual-class share structures to avoid losing out on more initial public offerings by technology giants like Alibaba Group Holding Ltd.

Allowing shares with extra voting power is part of a package of measures released Friday that may be the biggest change to the exchange’s listing rules since 1993, when it allowed large Chinese enterprises to go public there.

The bourse wants to better reflect “the drivers of the new global economy,” Chief Executive Officer Charles Li wrote in a blog, after earlier saying he hopes “a significant number of innovative companies” will start to choose Hong Kong by the second half of next year.

Alibaba’s decision to hold its USD25 billion initial share sale in New York three years ago spurred intense debate among bankers, brokers, exchange officials, investors and politicians about lifting a longstanding ban on stocks with dual voting structures. In the end, fear that more Chinese technology firms may choose to list elsewhere trumped warnings from large investors like BlackRock Inc. that such structures erode market integrity.

The Securities and Futures Commission recognizes that investors hope to tap a more diverse range of companies but also want strict safeguards to ensure that the share class doesn’t become commonplace, Chief Executive Officer Ashley Alder said in a statement Friday.

Each multiple-vote share would represent no more than 10 times the votes of ordinary shares, according to a Hong Kong Exchanges & Clearing Ltd. statement after a two-month consultation. Only companies with a focus on new technologies will be able to use the dual-class structure and founders and executives will need to demonstrate how their contribution merits it.

In addition to the dual-class proposal, the bourse plans to let biotech companies list without track records of profitability. It’s testing the waters in an area that can be crucial for attracting big tech companies and said more sectors could get this treatment in the future.

Hong Kong is adopting dual-class structures – long favored by technology firms as a way of letting founders and management retain control – as a new wave of fast-growing Chinese companies approach the stage where they might go public, from Ant Financial Services Group to Xiaomi Corp. and Tencent Music.

The planned changes also lift restrictions on secondary listings for “innovative” mainland Chinese companies and raise the minimum market capitalization for main exchange IPOs to HKD500 million ($64 million) from HKD200 million. Another round of consultation in the first quarter of 2018 will consider the detailed rules.

Hong Kong’s trajectory illustrates the power big companies wield as competition among exchanges for the hottest IPOs intensifies, said Martin Wheatley, the former head of the SFC in Hong Kong and the U.K.’s Financial Conduct Authority, in an interview before Friday’s announcement.

The push to adopt adopt a dual-classed system, which had long been stalled by resistance from the securities regulator and large fund managers, gained momentum this year as Carrie Lam was elected as Hong Kong’s chief executive. The previous administration under Leung Chun-ying was too preoccupied with popular discontent to pay much attention to the issue. MDT/Bloomberg