Hong Kong’s IPO quirks undermine its New York fightback

Hong Kong’s move to allow dual-class shares should attract a wave of listings by Chinese technology companies. It won’t be enough for the city to challenge New York as the global hub for new-economy fundraising.
Despite a year of hot flotations that included firms backed by Tencent Holdings Ltd. and Alibaba Group Holding Ltd., Hong Kong is close to being overtaken by its US competitor as the world’s top IPO venue, a title it’s held for two years. The package of rule changes is a pitch for the mainland technology leaders, unprofitable biotech firms and other ‘innovative’ companies that have sometimes eluded Hong Kong in the past. The overhaul follows years of soul-searching prompted by Alibaba’s decision in 2014 to abandon Hong Kong and sell shares in New York instead. Starting in mid-2018, Hong Kong Exchanges & Clearing Ltd. will scrap its long-held principal of one-share-one-vote, and allow dual-class share structures for companies, as long as they are deemed to be innovative.
The exchange also opened the door for such companies to trade in Hong Kong when they are already listed in New York, Nasdaq or the premier section of the London Stock Exchange. In the past, any overseas-listed company whose ‘center of gravity’ was in greater China couldn’t have a secondary listing in the city. The change will allow firms to offer shares to investors in Hong Kong.
The exchange is imposing some safeguards, essential in a city where family-controlled companies and those from the mainland don’t always respect minority investor rights, and where class-action lawsuits are unknown. Only firms with a market value of $1.3 billion are eligible for dual-class shares and privileges can’t be passed on to the next generation. The new rules will allow a founder to control a company with less than 10 percent of the stock, a concession that should draw listing candidates from across the border.
Still, technical quirks of the Hong Kong market may hamper its ability to compete with the New York and Nasdaq exchanges. Among them: The role of individual investors: They are a mainstay of Hong Kong IPOs because every offering by law must have a retail tranche. While they add buzz to a deal, they also bring volatility. In the US, the arranging bank decides whether to sell to individuals or restrict the sale to more long-term investors such as institutions. There’s a week between the pricing of an IPO and the start of trading in Hong Kong. In the US, stocks begin trading the day after pricing, limiting the risk of a market turn that can cause an IPO to tank. US filings under the JOBS Act, or initial share sales by firms with less than $1 billion in gross revenue, are confidential, whereas in Hong Kong they are made public immediately. That prevents companies from testing the market quietly. The price range of a Hong Kong IPO is fixed once individual investors subscribed and there’s little room for flexibility unless the float is relaunched.
Higher fees also give bankers an incentive to favour US listing. IPO charges in the US are between 6 and 7 percent of a float, versus a maximum of 2 percent in Hong Kong.
Dual-class shares help redress some of the imbalance between New York and Hong Kong. What might be a real game-changer is a ‘primary connect’ trading link that would allow investors across the border to buy into IPOs in the city, giving companies access to a wall of mainland money. Unfortunately for Hong Kong, that
appears to still be some way off.

— Bloomberg