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HKEX GUIDANCE LETTER
HKEX-GL90-18 (February 2018)
Pricing Flexibility for Initial Public Offerings ("IPO")
Listing Rules and Regulations
Paragraph 15(2)(c) of Appendix 1A of Main Board Rules
Paragraph 15(3)(c) of Appendix 1A of GEM Rules
Main Board Rule 2.13, GEM Rule 2.18
Listing Decisions HKEX-LD61-1 and HKEX-LD86-1
IPO Vetting Team
Important note: This letter does not override the Listing Rules and is not a substitute for advice from qualified professional advisers. If there is any conflict or inconsistency between this letter and the Listing Rules, the Listing Rules prevail. You may consult the Listing Department on a confidential basis for an interpretation of the Listing Rules or this letter.
1.1 This letter sets out the conditions under which an applicant is allowed to price the final offer price in an IPO below the indicative offer price or the bottom end of the indicative offer price range disclosed in the prospectus without triggering the withdrawal mechanism detailed in paragraph 2.4 below ("Withdrawal Mechanism"). Such pricing flexibility mechanism for IPO is referred to as "Pricing Flexibility Mechanism" below.
1.2 The Pricing Flexibility Mechanism is intended to provide an applicant with additional flexibility in pricing its shares to facilitate the determination of the optimal price (which reflects the price discovered through the book-building process) without resorting to the Withdrawal Mechanism which is considered cumbersome and leads to delay in the listing timetable. Investors' interests are safeguarded through the conditions imposed under the Pricing Flexibility Mechanism, including price reduction limits and enhanced disclosure in the prospectus and other related documents (see section 4 below).
1.3 The Pricing Flexibility Mechanism set out in this letter is implemented on a trial basis and will be subject to review by the Listing Department after 12 months of implementation.
2 Relevant Listing Rules and Listing Decisions
2.1 Main Board Rule 2.13
(GEM Rule 2.18
) states that the information contained in the document must be accurate and complete in material respects.
2.2 Paragraph 15(2)(c) of Appendix 1A
to the Main Board Rules (Paragraph 15(3)(c) of Appendix 1A
to the GEM Rules) states that the issue price or offer price of each security must be disclosed in the prospectus.
2.3 Listing Decisions HKEX-LD61-1 and HKEX-LD86-1 set out that a change in the offer price constitutes a material change of circumstances if there was no disclosure of such anticipated change in the prospectus. An applicant is required to adopt the Withdrawal Mechanism if it proceeds with its IPO.
2.4 The Withdrawal Mechanism requires the applicant, among other things, to (a) issue a supplemental prospectus informing potential investors of, among other things, the changes to the IPO, including the change in the offer price and offer period and the impact of such change on the sufficiency of working capital and use of proceeds; (b) extend the offer period to allow potential investors to have sufficient time to consider and, if they so desire, to confirm their applications using an opt-in approach1, that is, to positively confirm their applications for shares despite the change in the offer price.
3. Current Practice
3.1 The Listing Rules require that a prospectus must disclose an offer price for shares to be listed. In practice, we also allow an offer price range to be included in the prospectus and there is generally no restriction on the size of the range.
3.2 If an applicant decides to change the share offer price, the Withdrawal Mechanism will apply. This requires the applicant to issue a supplemental prospectus providing investors with updated information in light of the revision to the indicative offer price or offer price range (as applicable), and extend the offer period and give investors who have applied for its shares a right to withdraw their applications using an "opt-in" approach.
3.3 The Withdrawal Mechanism can be burdensome and costly.
3.4 Alternatively, the applicant may terminate its share offering and relaunch it some other time when it sees appropriate, but this may result in both delay and increased costs, including as a result of information (such as the track record period accounts) having gone "stale".
4.1 Applicants have an option to adopt the Pricing Flexibility Mechanism, without triggering the Withdrawal Mechanism. Salient features of the Pricing Flexibility Mechanism are as follows:
(a) applicants are allowed to price up to 10% below the indicative offer price or up to 10% below the bottom end of the indicative offer price range (subject to (b) below) disclosed in the prospectus;
(b) where an indicative price range is used, the range must be set with the top end of the range not more than 30% above the bottom end of the range;
(c) an applicant is required to make disclosures as described in paragraph 4.2 below, including the issue of a separate pricing announcement ("Price Reduction Announcement") as soon as practicable after the final offer price is determined and before the issue of the allotment results announcement; and
(d) for the avoidance of doubt, where the final offer price is more than 10% below the indicative offer price or more than 10% below the bottom end of the indicative offer price range, the Withdrawal Mechanism will be applied if the applicant proceeds with the IPO.
4.2 Disclosure requirements (see the suggested disclosure template in the Attachment
(a) in the prospectus, application forms and formal notice:
(i) clear and prominent disclosure of the indicative offer price or offer price range and the possibility of downward adjustment of the indicative offer price or the bottom end of the offer price range ("Downward Adjusted Offer Price");
(b) in the prospectus and application forms:
(i) detailed disclosure of how the Downward Adjusted Offer Price will affect the applicant including the change in the net proceeds from the offer and any associated change in the use of the listing proceeds, the impact on the applicant's future expansion plans, sufficiency of working capital, cash flow and (if applicable) profit forecasts and an appropriate risk factor;
(ii) a clear statement that if the final offer price falls more than 10% below the indicative offer price or more than 10% below the bottom end of the indicative offer price range, the Withdrawal Mechanism will be applied if the applicant proceeds with the IPO; and
(iii) a clear statement that the Pricing Flexibility Mechanism does not affect the applicant's obligation to issue a supplemental prospectus and to offer investors a right to withdraw their applications if there is a material change in circumstances not disclosed in the prospectus.
(c) in the Price Reduction Announcement:
(i) the Downward Adjusted Offer Price;
(ii) revisions to the net proceeds, use of proceeds, and market capitalisation; and
(iii) confirmation from each director of the applicant that, after taking into account the Downward Adjusted Offer Price, there is no material change of circumstances not disclosed in the prospectus after the issue of the prospectus and there is sufficient working capital for the applicant's requirements for at least 12 months from the date of the prospectus.
Although we encourage applicants to include disclosure as set out in this letter in their draft prospectus, application form and formal notice as early as possible, we appreciate that an applicant may adopt the Pricing Flexibility Mechanism only after the listing hearing. If there is a variation to the proposed disclosure in this letter, please consult the Exchange for guidance to avoid any unnecessary delay in the listing timetable.
4.3 The Exchange has to be satisfied:
(a) with the relevant disclosure in the prospectus and related documents mentioned in paragraph 4.2; and
(b) that the Downward Adjusted Offer Price will not affect the applicant's suitability for listing.
4.4 Applicants planning to use the Pricing Flexibility Mechanism must take into account the reduced proceeds when preparing:
(a) the forecast memoranda required under Main Board Rule 9.11
(10(a)&(b)) (GEM Rule 12.22
(b) the directors' statement on working capital sufficiency required under paragraph 36 of Part A of Appendix I to the Main Board and GEM Rules.
4.5 For the avoidance of doubt, applicants who do not choose to use the Pricing Flexibility Mechanism can continue to adopt the current pricing mechanism for IPO. If the final offer price is not the indicative offer price or is outside the indicative offer price range in the prospectus and the applicants wish to proceed with their IPO at the final offer price, the Withdrawal Mechanism will be applied. Also, for the avoidance of doubt, the Pricing Flexibility Mechanism does not entitle applicants to price the IPO shares above the indicative price or indicative price range.
1 An opt-in approach gives investors who have applied for shares in an applicant a right to withdraw. The applicant must obtain positive confirmation from the investors confirming their desire to proceed before it can bind them to their applications. If the subscribers do not re-confirm their applications, their applications will be rejected.
Suggested templates for the required disclosures (as shown underlined):
A. Extracts of White Form
B. Extracts of Prospectus:
- Important section
- Summary and other sections
- Definitions section
- Risk Factors section
- Information About the Global Offering section
- Financial Information section
- Future Plans and Use of Proceeds section
- Structure of the Global Offering section
C. Extracts of Formal Notice
D. Price Reduction Announcement
These templates are for reference only. Listing applicants and their sponsors should exercise judgment as to the applicability of the suggested templates to their cases
For Illustrative purpose, the following fixed offer price and offer price range are used in the suggested templates:
Scenario 1: Offer Price (Fixed)
Scenario 2: Offer Price (Range)
HK$6.50 to HK$8.45