Debate is swirling in Hong Kong over what to do with the city’s scandal-plagued alternative listing platform, once touted as Asia’s answer to the Nasdaq.
The Growth Enterprise Market, or GEM, home not long ago to eye-watering price swings of as much as 9,800%, hasn’t seen a listing since January 2021 after notching more than 70 just four years ago. Trading volumes last year slumped to 62% below its 2015 peak.
The market was brought to heel after a rash of scandals, culminating in the clampdown in 2019 on a group of 60 companies dubbed the “nefarious network.” Its future -- and the need for a platform for up-and-coming businesses -- is now being debated by Hong Kong’s decision makers.
The government is weighing easing listing rules for new technology firms as Hong Kong Exchanges & Clearing and regulators discuss how to accommodate fund raising by early-stage firms without revenue or profits.
“GEM is now a pool of dead water because institutional investors found no place in it,” said Catherine Leung, chairman of the Chamber of Hong Kong Listed Companies. “It’s a problem that needs to be solved.”
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The exchange has launched a review of GEM and is in talks with the Securities and Futures Commission, the market regulator. The review has a “specific focus on supporting the fundraising needs of companies at all stages of development,” a spokesperson for the bourse said in an emailed reply to questions.
The SFC is “in the early stages of exploring whether Hong Kong’s listing regime might accommodate sizable pre-profit or pre-revenue companies involved in capital-intensive advanced technology R&D,” according to a spokesperson. The regulator also said it “noted” research by the Financial Services Development Council, a government-backed think tank, which suggested revamping GEM into a professional investor-only market that can be “an incubator of early-stage fast-growing companies.”
The review comes at a pivotal time for the bourse, which is seeking to position itself as the new home for Chinese tech firms that are being increasingly shut out from US markets amid geopolitical tension and a crackdown by China on overseas listings. Hong Kong slid out of the top three in global IPOs this year and the market is reeling from the worst selloff since the financial crisis.
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Leung, the top lobbyist for the city’s listed company, said a new tech board would capture the needs of both big and small Chinese companies in areas such as mobility, semiconductors, robotics, machine automation and green energy. The time is ripe as China has vowed to become more self-reliant on strategic technology, she said.
That leaves little room for GEM to revive. Founded in 1999, the board was long popular with local entrepreneurs, pop stars and the wealthy. But it has mostly been marred by scandal. Its rules for going public, which allowed for a lower profit threshold and fewer shareholders, turned out to be easy prey for scammers to list dubious companies and then run pump-and-dump schemes that caused wild share price swings.
After countless warnings on high shareholding concentrations in GEM stocks, regulators in 2018 tightened rules to require higher market capitalizations, tougher disclosures and that at least 10% of the shares be sold to the public to increase liquidity and the costs of manipulating the market.
The board has lost 10% of its companies since 2018, now down to 353 firms. The S&P/Hong Kong GEM index has returned a negative 88.7% over the past five years, compared with a 2.45% drop for the benchmark Hang Seng Index.
At the same time, the exchange has made a series of changes to its main board rules to attract more big-ticket Chinese firms, allowing dual-class shares to pave the way for listings of the likes of Alibaba Group Holding It has also eased rules on the listing of biotechnology companies and set up a regime for blank check companies to sell shares.
Smaller brokers who dominated the GEM market in its hey-day are facing a dire future, with scores folding up shop.
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“The market policies are anchored with big firms and unfairly assume all small companies are evil just because some were,” said Stanley Choi, chairman of Head & Shoulders Financial Group, a one-time leader of arranging GEM IPOs. “There are still innovative homegrown firms but the environment doesn’t encourage them to list at home.”
Choi’s Head & Shoulders Financial two years ago shifted the broker’s focus to virtual assets and has applied for a cryptocurrency exchange license. He has let go of about a third of his staff.
“GEM is dead,” said Choi, a passionate poker player and consummate dealmaker who once owned U.K. soccer team Wigan Athletic.
Leung, a former JPMorgan Chase & Co. banker, agrees a fresh start is needed.
The city needs to “start with a clean slate to look at the great line-up of truly disruptive technology companies we have now in need of capital,” Leung said.
Photo: Bloomberg
