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Would HKEx’s new board actually be for crowdfunding?

The SFC wonders if HKEx’s proposed private, OTC venue is actually an equity crowdfunding platform.

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Hong Kong Exchanges and Clearing (HKEx) mooted its desire in January to launch a new board designed to attract technology listings, but if its ambitions lead it far enough, it may even end up competing with private crowdfunding platforms.

By creating a board that loosens listing requirements and is only eligible to professional investors, and by adopting blockchain technology to facilitate the digitalization of corporate actions and other documentation, the HKEx would do more than just support fintech companies. It would wade into some of these new business models.

For example, in Hong Kong, WeLab is a crowdfunding platform that works by serving professional investors on an over-the-counter basis. By sticking to this customer segment, WeLab avoids the need for a securities license, because as soon as retail investors get involved, the Securities and Futures Ordinance would mandate any peer-to-peer activity involving securities as requiring regulation.

Another example: in Singapore, startup Otonomos is also running a business using blockchain technology for corporate registration, which is also being extended to early-stage fund raising and potentially more ambitious uses aimed at private companies.

The HKEx’s new board could involve both aspects, although exchange officials have yet to submit a formal proposal to the Hong Kong Securities and Futures Commission, which must bless any such project.

Is it crowdfunding?
Benedicte Nolens, senior director and head of risk and strategy at SFC, told DigFin the new board, by lowering thresholds, would move its activity closer to that of equity crowdfunding. Her argument is that stock markets provide related benefits, such as liquidity for companies that facilitates further financing activity, and standardized disclosure for investors. By adopting a new board that caters to newer companies without the same track records or with looser listing requirements, HKEx might be effectively transforming its role from an open, transparent venue to something more closed, private and OTC, with liquidity challenges to match.

The HKEx spokesman rejected the characterization of a new board as ‘crowdfunding’.

Investment bankers also dispute the concern over liquidity, provided the new board attracts good companies, including some of the Chinese fintech players looking to IPO this year, including Ant Financial.

“The new board proposal is an admission by the HKEx that it’s too hard to change the Main Board’s rules because of incumbent vested interests,” said a head of syndication for equity capital markets at a global investment bank in Hong Kong.

A fresh start
Instead it wants to create a new venue with different requirements and a more flexible approach to corporate control that will appeal to the Ants, Lufaxes and Ping An Securities in the international IPO queue.

These companies are unlikely to favor the HKEx Main Board for the same reason Alibaba snubbed it: because of its one-share, one-vote requirement, which continues to be upheld by the SFC as a means of protecting investors.

Another reason for HKEx to set up a new board is that amending the securities ordinance would require approval by the Legislative Council – which is currently paralyzed as a byproduct of tensions between the Communist Party-backed administration and pro-democracy factions.

Despite missing out on tech companies, Hong Kong was the world’s top IPO destination last year, with $25 billion of value listed on the Main and GEM boards.

This has made it easy for Hong Kong’s retail brokers to defend the status quo.

“There are a lot of little brokers in Hong Kong whose lifeblood is margin finance and trading on capital-market situations,” the ECM banker said. “They make it difficult to change anything, because they’re connected to very powerful people.”

What’s an exchange for?
A lawyer sympathetic to the HKEx’s desire to attract good companies by offering dual-share classes told DigFin, “If Alibaba isn’t suitable to list here, then who is? Hong Kong needs to accommodate companies with visionary founders who need flexibility.”

It’s unclear, however, whether a new board would greatly improve Hong Kong’s primary capital market if it doesn’t also address the quality of investors, said the ECM banker.
Too many IPOs have been bought by shadowy investors connected to mainland Chinese entities that undermine the principles of transparency, and crowd out longer-term institutional investors, he said.

The Main Board’s rules, supposedly to protect investors, also make a mockery of quality capital markets by allowing local tycoons to effectively control listed companies in which they have, on paper, tiny shareholdings but layers of interests in holding companies. There is no sign that the new board would address this problem.

That said, the ECM banker didn’t think looser listing rules and a more private, OTC market equates to equity crowdfunding.

“The market is self-correcting,” he said. The challenge to HKEx won’t be liquidity, if its new board attracts good companies. “Ant Financial could offer negative voting rights and people would still buy it,” he said, half joking.

He said the bourse’s challenge is that the new board is so successful, it cannibalizes the Main Board.

A venue for venture capital?
One possibility, according to DigFin’s exchange insider, is HKEx creates a fourth board. (The spokesman said no fourth board was on the table, but said companies could be grouped under tiers: for example, allowing startups and early-stage companies to be accessible only to professional investors.)

Whether in a separate board or given a special categorization, this segment would have much looser listing requirements and ban retail investors from participating, making it more of a capital provider to late-stage startups.

Finally, HKEx is considering implementing blockchain technology for the new board(s) to create a digital share registry – and possibly to develop a market for trading equity shares of startups on an over-the-counter basis.

The HKEx spokesman said this ‘private market project’ using blockchain technology was only envisaged to provide registar functions, to enable more efficient and secure transmission of documents, such as in the case of corporate actions.

However, an exchange insider said the inspiration came from Korea, where its bourse has launched Korea Startup Market (KSM), a blockchain-as-a-service operated by local startup Blocko. It provides document and authentication services to enable the trading of shares in startup companies.

Blocko has already raised a Series A round of funding for Samsung Venture Investment Corporation.

“We want to support fintech, and support blockchain,” said DigFin’s source aware of HKEx’s internal discussions, adding that some managers at the exchange are concerned about falling behind Singapore and Australia as their exchanges embrace these trends.

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Would HKEx’s new board actually be for crowdfunding?