Hong Kong Exchanges and Clearing Limited (HKEX) has proposed amendments to its listing regime, aiming to assist small and medium enterprises (SMEs) to debut, while lawyers say that although this is a “historic opportunity”, tougher compliance requirements are on the cards. The South China Morning Post reported that the HKEX was considering merging the Growth Enterprise Market (GEM) with the main board, absorbing more than 300 GEM-listed companies, and introducing a new chapter 18D of the listing rules to allow SMEs that did not meet existing profit requirements to list.
Isaac Chen, an international partner based in Hong Kong at Haiwen & Partners, said the proposed chapter 18D and integration of the GEM into the main board would present relevant companies with “a historic opportunity to gain full access to the main board’s capital pool”. Eric Chow, managing partner of Commerce & Finance Law Offices’ Hong Kong branch, said chapter 18D would be “a genuine breakthrough for startups and growth companies with long commercialisation cycles that require substantial and sustained capital investment”.
Public consultation on the proposal is expected before the end of this year. In response to an inquiry from local public broadcaster RTHK, HKEX said: “The exchange will continue to explore further measures to enhance the listing regime, ensuring that it keeps pace with market developments and meets market needs. Further developments will be announced in due course.” Established in 1999, the GEM now sees few IPOs and sluggish trading.
At the end of July 2026, it had just 306 listed companies, with only two having joined the market in the first seven months of the year, while eight had been delisted. The GEM’s average daily turnover stood at HKD1.6 billion (USD204 million), down more than 60% year-on-year, leading to a total market capitalisation of HKD78 billion. In comparison, the main board had more than 2,400 listed companies and average daily turnover of HKD218.5 billion during the same period.
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Injecting Liquidity Into Small and Mid-Cap Segment
Chen said that against this backdrop, “the introduction of chapter 18D will inject liquidity into Hong Kong’s small and mid-cap segment and help establish a fundraising system covering the entire corporate lifecycle”. Chow agreed, saying chapter 18D would attract more local and Chinese mainland SMEs to list in Hong Kong. “For existing GEM-listed companies, obtaining main board listing status through chapter 18D could also strengthen their brands and improve liquidity, creating a virtuous cycle that supports corporate development,” he said.
Attracting Mainland Startups to Hong Kong
Chen added, “With A-share listings facing periodic tightening and the listing thresholds of the Star Market and ChiNext remaining high, chapter 18D will trigger a wave of Chinese mainland startups, and specialised and innovative SMEs heading south to list in Hong Kong.” He said the client base of law firms would expand from large red-chip and blue-chip companies to a broader range of innovative SMEs after the new rules took effect.
Their business model would also “evolve from standalone IPO filings into integrated, full-lifecycle legal services covering early stage financing, listing preparation and long-term compliance”. Chow said the reform could also encourage financing and M&A transactions involving GEM-listed companies, “enhancing the diversity, service capabilities and international competitiveness of Hong Kong’s capital market”.
Tougher Compliance and Investor Protections
While the proposed regime would open the market to more SMEs, both lawyers said that in-house legal teams and external counsel would need to scrutinise compliance more closely for companies seeking to list under chapter 18D, and the HKEX would also need to build investor protection into the rules. “Compared with conventional main board listing projects, due diligence under chapter 18D should place greater emphasis on the viability of the business model, expected growth drivers and stability of the core management team,” said Chen. “SMEs commonly suffer from internal controls that exist only on paper, blurred boundaries around connected transactions and weak foundations for financial compliance. Law firms will need to conduct due diligence to a higher standard to reduce substantive compliance risks and sponsor liability,” he said.
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Chen said in-house legal teams should clarify ownership of core intellectual property and equity incentives for key employees at an early stage, while strengthening deficient internal controls. When law firms advise companies on listings, Chow said: “Due diligence should focus on the company’s growth potential and sustainability as well as its historical compliance record.
Assessing whether a company has genuine and sustainable growth potential requires consideration of various indicators, such as the number of active users and repeat-purchase rates, and law firms therefore need to verify the underlying data. “Law firms also need to investigate past violations and potential compliance risks, focusing particularly on valuation adjustment mechanism agreements, nominee shareholding arrangements and regulatory breaches.” At the regulatory design level, Chen said chapter 18D should “strike a balance between broad access and rigorous supervision”.
He said that on investment thresholds, chapter 18D should draw on chapter 18C of the Main Board Listing Rules by requiring third-party professional investors, namely sophisticated independent investors, to lead investments and subscribe for a specified proportion of shares. This would allow market-based pricing to provide validation for SMEs.
For disclosure requirements, Chen said the new chapter could draw on the experience of chapter 18A of the Main Board Listing Rules by requiring mandatory and timely disclosure of business progress at different stages. “This would guard against companies peaking as soon as they list and avoid a repeat of the GEM becoming a breeding ground for shell companies and backdoor listings,” he said. “There should be strict lock-up periods for controlling shareholders, tight controls on shell value and share markers to alert investors to risks.” Chow said chapter 18D should “impose longer lock-up periods on shareholdings held by core management teams to safeguard companies’ stable development”. “The public subscription tranche could also be reduced to 5% or less, with most shares reserved for institutional investors capable of bearing the risks, thereby reducing exposure for retail investors,” he said.
