Key point! Chairman of the Hong Kong Securities and Futures Commission: Closely monitor the operational risks of listed companies' digital asset treasury operations.

The Chairman of the Hong Kong Securities and Futures Commission (SFC), Kelvin Wong Tin-yau, stated on Tuesday that the SFC is conducting a comprehensive review of the listing system to attract more innovative companies to list in Hong Kong. At the same time, the regulatory agency is closely monitoring the potential risks of listed companies using digital assets (Digital Asset Treasury, DAT) for cash management or as core business. The focus of this review is to drop the barriers and ensure fair treatment for investors, while expressing concerns about the high valuation premiums of DAT companies and the risks to retail investors. HKEX has raised questions about the plans of at least five companies attempting to shift to DAT core business.

Major Reform of Hong Kong Stock IPO System: Attracting Innovative Companies to Go Public

Hong Kong has regained the top spot in the global IPO rankings this year. Against this backdrop, the SFC is conducting a comprehensive review of the listing system in collaboration with the Hong Kong Stock Exchange (HKEX) to enhance Hong Kong's attractiveness to diverse enterprises.

• Drop valuation threshold: Huang Tianyou stated that the direction of this review is to relax the Weighted Voting Rights (WVR) system introduced in 2018. Currently, only innovative technology companies with a minimum valuation of 40 billion HKD (approximately 5.14 billion USD) are eligible for this system. The SFC may drop the 40 billion HKD threshold to allow more small but high-potential companies to list in Hong Kong.
• Strengthening Investor Protection: While relaxing listing conditions, the SFC adheres to its regulatory principles, namely ensuring overall market quality and fair treatment for investors. Huang Tianyou expressed concerns about significantly increasing the voting rights ratio of shareholders, as the current regulation stipulates that the voting rights of Class A shareholders must not exceed 10 times that of other shareholders. He believes that if the ratio is significantly increased, retail investors may lose their voice in major acquisitions or other corporate actions, harming the rights of minority shareholders.
• Definition of “innovative companies”: To prevent non-tech companies from abusing the system, the SFC will need to carefully define the scope of “innovative companies”.

Closely follow digital asset finance (DAT) risks

The SFC is turning its attention to the Digital Asset Treasury (DAT) sector, specifically how listed companies can use cryptocurrencies and other digital assets to manage excess cash, or seek to incorporate digital assets as part of their core business.

• Valuation premium risk: Huang Tianyou pays special attention to whether the stock price of DAT Company has a significant premium relative to its DAT holding cost. He cited cases from the United States, pointing out that such premiums can be very high, posing additional risks to investors trading in such stocks.
• Retail Investor Education: He emphasized that retail investors in Hong Kong may not fully understand the risks associated with DAT Company. The SFC is committed to enhancing public awareness and investor education to fully warn about DAT and its potential risks.
• Concerns from HKEX: According to reports, the Hong Kong Stock Exchange (HKEX) has recently raised questions about the plans of at least five companies attempting to make the DAT strategy their core business, citing existing rules that prohibit excessive holdings of liquid assets. The report also noted that the DAT strategy has faced similar opposition in India and Australia.

Conclusion

The comprehensive listing system reform by the Hong Kong SFC sends a positive signal to attract high-growth innovative enterprises, which is crucial for consolidating Hong Kong's status as an international financial center. At the same time, the regulators' prudence and focus on digital asset finance (DAT) reflect a determination to seek a balance between financial innovation and investor protection. For retail investors considering investing in DAT companies, the SFC's risk warning serves as a key reminder that the high premiums and lack of transparency may pose unpredictable risks.